CED Nonprofit Governance & Compliance 3 — Questions and Answers
Question 1: A nonprofit's bylaws require a quorum of two-thirds of board members to conduct business. At a meeting with 12 of 15 members present, is quorum met?
- No, because 12 is not two-thirds of 15
- Yes, because 12 exceeds two-thirds of 15 (Correct answer)
- No, because quorum requires unanimous presence
- Yes, because a simple majority always constitutes quorum
Correct answer: Yes, because 12 exceeds two-thirds of 15
Two-thirds of 15 is 10, and 12 members present exceeds that threshold, so quorum is satisfied.
Question 2: What distinguishes a nonprofit's 'interested party transaction' from a standard vendor contract?
- The contract value exceeds the annual operating budget
- A board member, officer, or key employee has a financial interest in the other party (Correct answer)
- The contract involves a government agency
- The vendor is located outside the organization's state of incorporation
Correct answer: A board member, officer, or key employee has a financial interest in the other party
An interested party transaction involves a person with authority over the nonprofit who also has a personal financial stake in the contracting entity.
Question 3: Under IRS intermediate sanctions rules (Section 4958), who is considered a 'disqualified person'?
- Any staff member earning above minimum wage
- Someone in a position to exercise substantial influence over the organization's affairs (Correct answer)
- A volunteer with no compensation
- A restricted grant funder
Correct answer: Someone in a position to exercise substantial influence over the organization's affairs
Disqualified persons include those who can substantially influence the organization, such as executive directors, board members, and certain key employees.
Question 4: A nonprofit receives a restricted gift for a specific program that was later discontinued. What is the BEST course of action?
- Transfer funds to the general operating budget immediately
- Return the funds to the donor or seek donor approval to redirect them (Correct answer)
- Use the funds for any charitable purpose at the board's discretion
- Deposit the funds into the endowment without notification
Correct answer: Return the funds to the donor or seek donor approval to redirect them
Restricted gifts must be used as the donor specified; if circumstances change, the organization must seek donor consent or apply cy pres doctrine to redirect funds.
Question 5: Which governance document establishes the internal rules for how a nonprofit is managed, including meeting procedures and officer roles?
- Articles of incorporation
- Form 990
- Bylaws (Correct answer)
- Conflict of interest policy
Correct answer: Bylaws
Bylaws are the internal operating rules that govern board and officer procedures, meeting requirements, and organizational structure.
Question 6: The board of a nonprofit approves compensation for the executive director without reviewing comparable salary data. This failure most likely violates which fiduciary duty?
- Duty of loyalty
- Duty of obedience
- Duty of care (Correct answer)
- Duty of disclosure
Correct answer: Duty of care
Duty of care requires board members to make informed decisions; approving compensation without market comparables fails the standard of a prudent person.
Question 7: What is the legal consequence of 'private inurement' in a 501(c)(3) organization?
- Loss of state charitable registration
- Revocation of federal tax-exempt status (Correct answer)
- Mandatory audit by the state attorney general
- Suspension of fundraising activities for 90 days
Correct answer: Revocation of federal tax-exempt status
Private inurement — the improper diversion of nonprofit assets to insiders — can result in revocation of 501(c)(3) status by the IRS.
CED Nonprofit Governance & Compliance 3
A nonprofit's bylaws require a quorum of two-thirds of board members to conduct business.
At a meeting with 12 of 15 members present, is quorum met?