501(c)(3) Governance & Bylaws Flashcards

Which of the following actions would most likely constitute 'private inurement' for a 501(c)(3) organization?

Answer: Awarding the executive director a salary substantially above market rate based on a board decision

Private inurement occurs when organizational assets improperly benefit insiders (like executives or board members), such as excessive compensation beyond fair market value.

What does 'duty of obedience' require of nonprofit board members?

Answer: Ensuring the organization adheres to its stated mission, bylaws, and applicable laws

The duty of obedience requires board members to ensure the organization operates consistently with its mission, its governing documents, and all relevant laws.

A nonprofit's board votes to dissolve the organization. Under 501(c)(3) rules, remaining assets after liabilities must be:

Answer: Transferred to another 501(c)(3) organization or government entity

Upon dissolution, 501(c)(3) organizations must distribute remaining assets exclusively to other tax-exempt organizations or governmental entities—not to individuals.

Which committee is most responsible for evaluating and recommending candidates for open board seats?

Answer: Governance or nominating committee

The governance or nominating committee identifies, recruits, and recommends qualified candidates to fill board vacancies and ensures effective board composition.

What is the primary risk when a nonprofit holds its board meetings without proper notice to all members?

Answer: Decisions made at the meeting may be legally void or challengeable

Actions taken at improperly noticed meetings may be invalid because all board members did not have a fair opportunity to participate.

Which of the following is TRUE about nonprofit board members' personal liability for organizational debts?

Answer: Board members generally have limited personal liability but may be liable for willful misconduct or unpaid taxes

While incorporation generally limits personal liability, board members can be held personally liable for willful misconduct, unpaid employment taxes, or fraud.

What is the recommended practice when a board member has a potential conflict of interest regarding a vendor contract under consideration?

Answer: The board member should disclose the conflict, abstain from discussion, and not vote on the matter

Best practice and most conflict-of-interest policies require disclosure of the conflict, leaving the room during discussion, and abstaining from the vote.