Ohio Nonprofit Executive Compensation Compliance and Other Arms-length Transactions in 501(c)(3)s

For scaling 501(c)(3) tax-exempt organizations, transitioning to compensated leadership or entering into contracts with board members creates significant legal exposure under federal tax laws and state nonprofit regulations.

To avoid IRS sanctions —which impose personal excise taxes on executives and board members—nonprofits must strictly follow three key steps to create a rebuttable presumption safe harbor. This requires advance approval by an independent board, reliance on robust comparability data and concurrent written documentation. Proactively structuring executive compensation and insider deals safeguards the organization’s tax-exempt status, public reputation and funding sources.

Early in the life of a tax-exempt entity, the organization heavily relies on volunteer labor and founder contributions. Decision-making tends to be very informal (for better or worse). And financial arrangements are straightforward. And legal exposure is relatively low. However, as the organization secures grant funding, expands program revenue and achieves operational maturity, it must transition to professional leadership.

Please select this link to read the complete article from OSAP member MSN Law.