501c3 501(c)(3) Nonprofit Board of Directors and Membership Classes

There are two different classes of voting members as a governing method for a 501c3 501(c)(3) nonprofit organization.

1. The most recognizable form of nonprofit corporate governance is through the board of directors with absolute powers, meaning the legal powers of the organization are vested in its board and the board only.
2. The other form of nonprofit governance is through a class of optional voting members who may have the powers to elect or appoint board members, and consequentially have control over the nonprofit board of directors. This system of governance is archaic, problematic, and an absolute headache. Having voting members not only complicates the organization, it also creates potential for legal pitfalls as every state has different rules and regulations regarding voting-member classes and their powers.

If you're just starting a nonprofit organization, you should absolutely stay away from having voting members and at the time of the incorporation of the nonprofit you should elect to have all the legal powers of the organization to be vested in its board of directors.

Who Chooses the Board of Directors for 501c3 501(c)(3) Nonprofits?

The nonprofit board of directors of a 501c3 501(c)(3) is an elected governing body and there should be no appointment or selection except for member-driven organizations. The board members of a nonprofit are elected during board meetings of an existing board by existing directors for a set term.

Board of Directors of a New Nonprofit Organization

The only exception is the preliminary board of directors of a newly formed nonprofit organization which are appointed normally by the founder / incorporator. Contrary to what the norm should be, a group of people seldom get together to form a nonprofit organization, it's usually a single person with some kind of dream and aspiration who starts the nonprofit and then starts looking for board members.

However, initial nonprofit board of directors should have a board meeting and elect new directors as soon as possible.

Can the Founder of a 501c3 501(c)(3) Nonprofit be on the Board of Directors?

Yes, the founder of a 501c3 501(c)(3) nonprofit organization may serve on the board of directors and they usually do. However, refrain from adopting undemocratic terms or special considerations for the founder in the bylaws. The nonprofit founder should not be appointed for life or have any other privileges or powers that a regular board member does not have. Ready to get a little pissed? Read my article on why founders aren't owners of a nonprofit.

Can Family Members be on the 501c3 501(c)(3) Nonprofit Board of Directors?

The question of electing family members to the board of directors of a 501c3 501(c)(3) nonprofit organization comes up on a daily basis and I can't give a yes or no answer. Electing family members as directors is usually not a good idea because of the naturally existing conflict of interest. Let me go through a few scenarios so I can explain it.

For example, organization A which is recognized under section 501c3 501(c)(3) as a tax-exempt organization has four board members. The president and secretary are related through marriage and they both work in other capacities other than board directors for the organization as well.

When the time comes to set the compensation or salaries of these two employees, both of these related directors should recuse themselves from attending that board meeting because of a conflict of interest. Potential problems are that:

1. the quorum is not reached.
2. the vote is not of a majority.
3. and forgetting the last two, if there is one YES vote and one NO vote then you have a tie.

Electing family members to the 501c3 501(c)(3) nonprofit board of directors usually negates the very spirit of nonprofit governance as it's a leading factor for corruption and insider dealings which can lose you your exemption status.

On the other hand, if  family members are not compensated in any way, and the board is large enough to meet legal requirements for meetings and decision makings; usually there is no problem with having some related board members on the board of directors.

Contrary to 501c3 501(c)(3) public charities, private foundations can, and do, elect family members on their boards because the nature of their revenue is not public and there are no limitations, usually, as long as they follow the laws.

Knowing all that, you should elect qualified and justified persons to the non-profit board of directors regardless of their relationship status. At the same time, stay away from electing related directors through relationship and business.

Who are the Officers and How are They Different From Directors?

This is a source of great confusion for many and these titles are used interchangeably by mistake and failure to understand and practice the correct procedures has grave consequences. Nonprofit directors (board members) are unpaid volunteer legislators who have one vote each and set the policies and the programs of the organization.

501c3 501(c)(3) Board members cannot be paid and compensated for their board duties and collectively have all the powers of the organization. I say collectively because no single board member by definition has any power whatsoever other than casting a single vote. It's their vote in a board meeting that counts towards the approval or disapproval of the agenda.

Officers of a nonprofit on the other hand by default have no voting powers, they are appointed, hired, or removed by the board of directors. And this is where it gets confusing because there are two classes of officers in a nonprofit corporation:

• voting officers as defined in the bylaws
• and non-voting officers.

Voting Officers of a 501c3 501(c)(3) Nonprofit Corporation

Voting officers of the organization are at the minimum the President, Treasurer, and the Secretary. These officer positions and titles are required in some shape and form by every state and nonprofits should have the minimum of the three mentioned officers. Even if one particular state doesn't require all three, you still need all three for tax-exemption sake.

Almost all 50 states allow one person to hold two officer positions at the same time, such as President and treasurer, but generally the same person should not hold the offices of president and secretary at the same time. My best advice is that they all should be different people to keep the IRS happy.

And here's the kicker, board members CAN hold voting officers position. Meaning when set up correctly in the bylaws, the president is also a board member, so is the treasurer and the secretary or the vice president. This form of governance makes it easy for the nonprofit board of directors to plan, adopt, and execute their own agendas without burdensome and ungodly complicated procedures to keep three different classes of members in line.

Non-Voting Officers of a 501c3 501(c)(3) Nonprofit Corporation

Non-voting officers of a 501c3 501(c)(3) nonprofit corporation are Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating Officer (COO) and so on.

Non-voting officer positions are generally paid positions, meaning that non-voting officers of a nonprofit are employees of the organization, not policy makers. Because they get compensated by the board, they have a conflict of interest to sit on the non-profit board of directors.

A board member should not hold non-voting officer position, meaning that the title president and CEO is an oxymoron. It's an oxymoron because as we discussed earlier, a compensated officer should not be a board member, and since we set up the non-voting office of president as a board position, they conflict.

The only way in this scenario that the president could also be the CEO is that if the CEO position was a volunteer position, not a paying one. This again just confirms the insanity and egotistical personality of the office holder because it would be just collecting trivial titles.

Leadership of a non-profit corporation is nothing like a for-profit, holding this executive title or that title doesn't give anyone any special powers.

501c3 501(c)(3) Nonprofit Board of Directors Age Requirements and Minors

Minors and teenagers are time bombs and are not reliable candidates for 501c3 501(c)(3) board positions. If you're under 18 and reading this then you will be infuriated, but if you're above the age of reason this might make sense to you.

There is unmatched, unleashed passion and enthusiasm in the ideas and convictions of young people that can start social change in a way that no other generation could, and for better or worse; it's a force to be reckoned with. Harnessing this power is either a blessing or a colossal disaster waiting to happen.

There are two problems with the issue of a minor serving on a nonprofit board of directors:

• Legality of underage board members
• Potential irreparable compliance blunders

Legality of Appointing Underage Nonprofit Directors

First and foremost, it might be illegal in your state to allow a minor to serve on the board of directors. For example, The State of Alaska's minimum age requirement for a board member is 19 years of age with no exception, while the state of Florida allows for one director to be of 15 years of age or older. Most other states are either 18 years of age minimum, or have no specific laws regarding the issue.

When a state statute doesn't specifically mention the age limit, it doesn't mean that allowing a minor on the nonprofit board of directors is legal; it just means that it is almost certainly illegal in most cases, and the legislators didn't have to state the obvious.

Compliance and Potential Pitfalls of Appointing Minors to 501c3 501(c)(3) Nonprofit Board Positions

Legality and practicality aside, minors are called minors because they haven't reached an age of reason, nor do they have any real life experiences. If you have kids, then you already know their arguments, however passionate and convincing (in their own minds), lack any grounding in reality.

With the emergence of youth movements such as climate change crisis and their fearless leader Greta Thunberg, more and more parents are nominating and agreeing with their kids to take parts in starting nonprofits for this cause or another.

Having fresh ideas or different views outside of the status quo is healthy, effective, or even necessary, but beware of its consequences. To paint you a little picture, let's say you have an organization with a mission of combating climate change and your underage minor board member decides to lambast a political candidate running for public office, and endorse another candidate who's more aligned with her ideas of a green world. After all, Greta does it, so why not?!

On the face of it, it's a passionate act and the right thing to do. On the other hand, your little Kristina just brought the 501c3 501(c)(3) exempt organization to its knees by jeopardizing its tax-exemption status by engaging in lobbying and political activities, opening the entire board of directors to lawsuits, not counting the hefty penalties and sanctions by the IRS. And since she's a minor, she'll walk away, but there will be hell to pay for the adults who gave her these powers.

A child's brain doesn't mature overnight, but a child can make your life hell overnight. Stick with adults and competent adults while you're at it. If I have to say more on this subject for you to understand why it's a horrifying idea to have minors as board members, you're just trying to justify the unjustifiable. Let's move on.

501c3 501(c)(3) Nonprofit Board of Directors and Board Members Compensation / Salary

Nonprofit board members who are the leadership class cannot be compensated or paid a salary for their board duties, not a single penny. This is extremely important. You cannot in any shape or form compensate this voting class as you will lose your tax-exemption, period.

However, 501c3 501(c)(3) board members who also perform other services for the organization such as holding an executive position may be compensated for their unrelated activities but usually that means a conflict of interest to begin with and we're back to square one.

I know that there are many nonprofits who do compensate their directors, but that doesn't mean you should. If you need an employee, hire someone from the outside with no business and relationship conflict and refrain from hiring from the inside, no matter how qualified that person is.

I won't go into too much detail here as if you're looking for more information, most likely you're trying to justify something that I wholeheartedly oppose and shouldn't be done. You should read my article on nonprofit CEO salaries & executive director compensation to know where I stand.

501c3 501(c)(3) Nonprofit Board of Directors Positions, Roles, and Responsibilities

In a 501c3 501(c)(3) nonprofit corporation, the voting director offices are volunteer positions and cannot be compensated. The following are standard leadership positions that almost every state requires for governance of a nonprofit organization including their role in the matter.

Board President

The nonprofit board president or chairman (don't use chairman as legal title) is the chief volunteer officer of the organization. The board president leads the board of directors in performing its duties and responsibilities, including presiding at all meetings of the nonprofit board of directors, and performs all other duties incident to the office or properly required by the board of directors. Simply put, the board president role is to be the elected leader of the board of directors.

Board Vice President

As the name suggests, the nonprofit board vice president is the second in line after the president which in the absence or disability of the board president performs the roles and duties of the board president. The vice president normally takes the place of the president at the completion of the president's term of office.

Board Secretary

The corporate secretary is probably the most important role in a nonprofit as the secretary is in charge of record-keeping, maintaining a book of minutes of all meetings and actions of the board and its committees.  The secretary is also in charge of giving notices for all meetings of directors and committees as required by the bylaws. Most importantly, it's the job of the nonprofit secretary to certify any board resolution such as amendments to the bylaws and the articles of incorporation.

Board Treasurer

The role of a nonprofit board treasurer is leading and overseeing of financial affairs of the organization. The nonprofit treasurer's job is to oversee and keep the board informed of the financial situation of the organization. The board treasurer oversees budgeting, financial reports, tax and information returns (Form 990), employment accounting and forms, and anything and everything financially related in the affairs of the organization. The board treasurer should be a competent financial person with attention to detail, as one simple mistake could cost the organization dearly.

How to Remove a Nonprofit Board Member

More often than not, you have to remove a board member and elect another. Barring specific state laws, removal and election of directors are usually done by a simple majority vote of the existing board members. The removal and election procedures should be spelled out in detail in the bylaws of the 501c3 501(c)(3) nonprofit, because when the time comes, it's usually not a friendly situation and the bylaws are the only thing that can alleviate internal hostilities and animosities.

If the board member removal is by a mutual decision due to lack of time, health issues, or other amicable situations, you have nothing to worry about. However, removal of pesky board members requires finesse; keep your emotions at bay and don't burn bridges.

Treat them with respect during the removal process, and even more so when they don't deserve it. Disgruntled board members can and will make trouble for the organization and you don't want to antagonize them and give them more ammunition. I have a complete article on removing a toxic board member which you should read as well.

Can a 501c3 501(c)(3) Nonprofit Have Only One Board Member

Founders ask this because state incorporation laws are misleading. A handful of states let you register a nonprofit corporation with one director, but that has nothing to do with federal tax exemption. State law handles paperwork. The IRS handles public interest, oversight, and private benefit. Those are not the same universe.

A one person board cannot satisfy the independence standard that appears in Form 1023. One person cannot vote against themselves, cannot recuse themselves from conflicts, and cannot provide fiduciary separation. The IRS has denied one director boards for decades, regardless of what the state allows.

If you want 501c3 501(c)(3) status, assume a minimum of three directors who are not related, not compensated, and not financially tied to each other. Anything less looks like a private project trying to masquerade as charity, and examiners flag it immediately. This is why your Nonprofit Bylaws Template, Articles of Incorporation, and Conflict of Interest Policy all assume more than one director. A nonprofit with one board member is a governance failure before it even starts.

501c3 501(c)(3) Nonprofit Board Minimum & Maximum Number of Directors

The states of  Washington, Virginia, Oklahoma, North Carolina, Nevada, Massachusetts, Maryland, Kansas, Iowa, Georgia, Delaware, Colorado, California and Arizona all have a minimum requirement of one (1) director while every other state has a minimum requirement of three (3) directors.

Keep in mind that even the states that have a set number of directors requirement for nonprofit corporations, almost all have completely contradictory laws that apply to religious organizations. You should always check the state laws to see what the minimum number of directors for a given organization type is, but to be safe, you should NEVER set the minimum number of directors below 3 (New Hampshire minimum is five).

What the incorporating state requires for the number of directors is mostly irrelevant when it comes to applying for federal tax-exemption. The IRS is not one bit shy to deny your 501c3 501(c)(3) application if it feels that the board structure is not sufficiently diverse or is set up to benefit the organization insiders.

Diversity of the 501c3 501(c)(3) Nonprofit Board of Directors

A diverse board of directors is essential to the success of a nonprofit organization and, in many cases, to maintaining its tax-exempt status. This diversity should be based on having no conflict of interest between board members and this is a very important issue.

Diversity of nonprofit boards doesn't mean political correctness, so don't just elect Black, White, Hispanic, and Chinese board members for show, race and ethnicity has nothing to do with it. A diverse nonprofit board of directors should be comprised of individuals who are not related through business or relationship, are qualified to be there in the first place, and have absolutely no conflict of interest.

Minimum and Maximum Number of Terms That a Nonprofit Director Can Serve

Every state either specifies how many terms a director can serve on the board, or leaves it to the organization's bylaws. Some states like New Jersey have a limit of one term, whereas Delaware leaves it up to the organization and until a new board member is elected. You should always check with your own state to find out what the maximum term a director may serve is, but in my experience, it should never be more than two terms and one term is perfectly sufficient.

The length of the term is usually defined by the nonprofit organization in its bylaws unless specifically dictated by the state. A term of two years is more than enough and you should abstain from increasing it even if the state allows it. Unless you feel very close to the ideology of figures like Putin or  Kim Jong-un, keep the term length to two years maximum.

Nonprofits Board of Directors and Board Members Insurance

The subject of having insurance for board members comes up almost every day and let me clear the air once and for all. If you're the type of person that has insurance for the butterflies and the flowers in your garden, by all means skip this section because you're insane and nothing I say will change your mind. If you're somewhat normal and can comprehend the meaning of Incorporation then listen:

Nonprofit board insurance is as good as a gun with no ammunition. It might give you a sense of security but having it or not having it doesn't make any difference.

• Incorporating a nonprofit corporation is for a few reasons, but one of the most important reasons is indemnification of its directors from personal liability. Your board members are Natural Persons, meaning they breathe, eat, and are human. A corporation is a Juridical Person, even if it's made up of directors who are mere mortals.
• The act of incorporation and its instrument, the articles of incorporation, automatically separates the natural persons from the legal person which is the corporation. In layman's terms, your directors cannot be held liable for the corporation's faults as long as they act in good faith, in line with their fiduciary duties, and the best interests of the corporation.

Nonprofit directors can be held liable personally for fraud, embezzlement, criminal activities and so on, but again, no insurance company in the world would pay out a dime for these reasons. Knowing that, if you still want to insure what's already insured by law, be my guest.

Important. Don't mistake board members' insurance with general liability insurance for the corporation, that's a completely different matter. We live in an age of unprecedented frivolous lawsuits where anyone can sue another for the most bizarre claims. If you have any interaction with the general public, any animals or human beings, the liability insurance is an absolute must. Don't get it and you'll be sorry later. I have a complete article on nonprofit insurance (D&O, E&O, and Liability) which you should absolutely read.

501c3 501(c)(3) Nonprofits Board Committees

From time to time, a 501c3 501(c)(3) nonprofit board of directors may need to establish and form committees for various reasons, such as providing scholarships. State laws are different regarding corporate committees, however, almost all states require a minimum of one or two board members to be on the committee.

The best and safe practice is that board committee members are selected from directors of the board itself rather than outside persons and the number of committee members should be kept to a minimum of three. Keeping the board and committee members the same also reduces back and forth reporting and meetings.

Recording 501c3 501(c)(3) Nonprofit Board Minutes

Unless you're running a multi-billion dollar organization, don't complicate your board meetings. You don't need Robert's Rules of Order or other archaic systems of conducting your board meetings. You need to record a few simple things in your board minutes:

• Date, time and location of the board meeting. It can be on Skype, Zoom, phone, via email or in person.
• Names and titles of board members present and absent at the meeting.
• Status of quorum of the board.
• Corrections and amendments to previous board meeting minutes if any.
• The agendas of the meeting at hand.
• The votes on the agendas.
• and finally the certification of the board meeting minutes by the corporate secretary.

That's it. Don't record off the record conversations in minutes, or anything else that's not related to the board meeting. Keep nonprofit board minutes concise and informative. Here's a sample / template board meeting minutes I put together for you which will cover all your board meetings needs.