Nonprofit Formation Services

Nonprofit Conflict of Interest Policy: What It Should Include and How to Use It

Your board is considering a contract with a company owned by one of its directors. The relationship has been disclosed. What happens next?

That is where a nonprofit conflict of interest policy becomes useful.

A written policy can give your organization a process for identifying an interest, deciding whether it creates a conflict, managing participation, reviewing the transaction, making a decision, and documenting what happened.

A written conflict-of-interest policy is not a universal federal prerequisite for obtaining 501(c)(3) recognition. The IRS nevertheless encourages appropriate conflict procedures, federal tax law independently restricts improper private benefits, and state law may create additional requirements. A useful policy needs to work with all of those rules—not simply require someone to disclose a relationship.

Does a Nonprofit Need a Conflict of Interest Policy?

For most organizations, the question cannot be answered accurately with a simple nationwide “yes” or “no.” Different authorities do different things.

Federal Tax Law

Section 501(c)(3) does not create a separate universal requirement that every organization adopt a document titled “Conflict of Interest Policy.”

It does impose substantive restrictions that make conflicts important.

A 501(c)(3) must operate for qualifying exempt purposes rather than impermissibly serving private interests, and its net earnings may not improperly inure to private shareholders or individuals.

A conflict policy can help an organization recognize situations in which those concerns may arise. But possessing the policy is not a substitute for following the underlying law.

IRS Governance and Form 1023

The IRS encourages organizations to use appropriate conflict procedures.

The current Form 1023 instructions also provide a sample conflict-of-interest policy in Appendix A. Importantly, the instructions state that adoption of the policy is not required to obtain tax-exempt status and that the sample does not prescribe one mandatory set of requirements for every organization.

Form 1023 separately asks about compensation, relationships, and transactions involving insiders. The IRS's interest therefore goes beyond whether a document exists. The actual financial and organizational arrangements matter too.

Form 990

Form 990 creates another distinction.

For organizations answering the applicable governance questions, the form asks about three separate practices:

Policy → Disclosure → Implementation

In other words, does the organization have a written policy? Does it require specified leaders to disclose relevant interests annually or more frequently? And does it regularly and consistently monitor and enforce compliance?

Those questions should not automatically be translated into separate statutory mandates. The IRS explains that the governance policies addressed in this part of Form 990 are generally not required by the Internal Revenue Code, and a “No” response does not by itself establish that the organization violated federal tax law.

State Law

State law can change the analysis considerably.

Some jurisdictions impose specific written-policy requirements on covered organizations. Others regulate interested, related-party, or self-dealing transactions through statutory approval, fairness, disclosure, or participation rules.

So “the IRS encourages it” and “the law requires it” are not interchangeable conclusions.

A nonprofit should determine which rules apply to its legal structure, location, activities, and proposed transaction.

Conflict procedures are one part of the broader process of [how to start a 501(c)(3)], but they also need to continue working long after formation.

What Is a Nonprofit Conflict of Interest?

In practical terms, a conflict of interest can arise when someone involved in an organizational decision has a personal, financial, family, business, employment, professional, or other interest that could interfere—or reasonably appear to interfere—with independent judgment for the nonprofit.

That can include situations involving:

●      ownership of a business seeking a nonprofit contract;

●      compensation from the organization;

●      employment of a family member;

●      a lease or property transaction;

●      professional services provided by a director;

●      investments or other financial interests;

●      relationships with vendors or contractors; or

●      responsibilities to another organization whose interests overlap with the nonprofit's.

The exact legal definition is not identical in every context.

Your policy may distinguish among actual, potential, and apparent or perceived conflicts as useful governance categories. Those labels should not be treated as three universal categories established by Section 501(c)(3). The governing law, reporting form, and organization's own policy may define the relevant conflict differently.

Form 990 illustrates the point. For its conflict-policy question, the IRS uses a financial-interest-oriented definition. Competing responsibilities to two organizations are not necessarily treated as a Form 990 conflict when there is no material financial interest or benefit.

Your organization may still choose to address those competing loyalties in a broader governance policy.

The policy should define the situations it covers clearly enough that directors and other covered individuals know when they need to speak up.

Why Conflict Management Matters for a 501(c)(3)

Conflict procedures are closely connected to a larger federal concern: a charitable organization exists to advance its exempt purposes, not to provide inappropriate private advantages.

Two concepts help explain the issue.

Private Inurement

Private inurement is an especially important insider-oriented restriction under Section 501(c)(3). The organization's net earnings cannot improperly benefit private shareholders or individuals.

Transactions involving founders, officers, directors, executives, or others with meaningful influence therefore deserve careful review when economic benefits are involved.

Private Benefit

Private benefit is broader.

A charitable organization cannot be organized or operated for private interests rather than its exempt purposes. Not every benefit received by a private person creates a violation, but private interests cannot become the organization's purpose or more than an appropriate consequence of carrying out its exempt work.

A conflict policy cannot make an otherwise impermissible transaction lawful.

The same principle applies to Section 4958. Certain economic transactions involving individuals with substantial influence over an applicable tax-exempt organization can raise excess-benefit concerns. Compensation, leases, property transfers, contracts, or other financial arrangements may require analysis beyond ordinary disclosure and recusal.

For certain compensation or property arrangements, federal tax regulations provide a process that can create a rebuttable presumption of reasonableness when an appropriately authorized unconflicted body approves the arrangement in advance, relies on appropriate comparability data, and contemporaneously documents the basis for its decision.

That is one reason an organization should not treat “the interested person abstained” as the end of every legal inquiry.

What Should a Nonprofit Conflict of Interest Policy Include?

A strong policy gives your organization enough direction to respond consistently when a real situation arises.

The IRS sample offers a useful model structure, but its provisions should not automatically be treated as mandatory nationwide language.

Who the Policy Covers

Start by defining who is subject to the policy.

Depending on the organization and applicable law, that may include:

●      directors or trustees;

●      officers;

●      key employees or key persons;

●      members of committees with decision-making authority; or

●      other people whose roles give them meaningful influence over organizational decisions.

There is no single nationwide list that every nonprofit must adopt.

The appropriate scope depends on your governance structure, state law, reporting obligations, and where real decision-making authority sits.

Financial and Personal Interests

The policy should explain the interests that may need to be disclosed.

Financial interests can include ownership, investment, compensation, contractual arrangements, property interests, or economic relationships involving the individual or people and businesses connected to that individual.

An organization may choose to address additional personal or professional relationships as well.

A policy that simply tells people to report “all conflicts” without explaining what that means can leave board members unsure when disclosure is expected.

Duty to Disclose

A covered person should know when and how to disclose a relevant interest.

Annual disclosure questionnaires can help identify relationships before a transaction reaches the board. But an annual form does not eliminate the need for new disclosure during the year.

If a director signs an annual statement in January and their company becomes a potential vendor in September, the September situation still needs to be addressed.

Determining Whether a Conflict Exists

The policy should identify who determines whether a disclosed interest actually creates a conflict.

Disclosure and determination are separate steps. Reporting a relationship should trigger review rather than automatic approval or disqualification.

Participation and Recusal

A policy should address what role an interested person may have in the decision.

The IRS model and certain state laws use nonparticipation procedures, but there is no single nationwide recusal rule. State law can treat presence, quorum, participation, and voting differently.

The policy should therefore establish a procedure that works with the law and governing documents applicable to the organization.

Review of the Proposed Transaction

The policy should explain how an interested transaction is evaluated by the decision-makers permitted to act.

Depending on the issue and governing rule, relevant considerations may include:

●      alternatives;

●      comparable compensation information;

●      fair-market-value evidence;

●      reasonableness;

●      fairness;

●      whether a more advantageous arrangement is reasonably available; and

●      how the transaction benefits the organization.

The later workflow explains how this review works when a specific conflict reaches the board.

Voting

The policy should coordinate with the voting rules established by applicable law and the organization's governing documents.

A conflict policy should not create a voting procedure that contradicts the statute or bylaws governing the organization.

The board also needs to know whose vote counts and whether an interested participant may be included for quorum or voting purposes under the applicable rule.

Meeting Minutes and Documentation

The minutes should create a contemporaneous record of how the matter was handled.

Depending on the circumstances, that may include the interest disclosed, who participated, whether a conflict was determined to exist, relevant information considered, the vote, and the board's decision.

Minutes do not need to become a transcript. They should show enough of the process to document how the organization addressed the issue.

Compensation

Compensation is one of the most common settings in which conflict procedures and substantive tax rules overlap.

A founder, executive, director, or other insider is not automatically prohibited from receiving compensation because of their relationship to the nonprofit.

The organization may nevertheless need appropriately independent review, reliable comparability information, and careful documentation. Section 4958 may create additional considerations for certain applicable tax-exempt organizations and disqualified persons.

Annual Statements or Disclosure Forms

An annual conflict-of-interest disclosure form can help identify relationships before they become part of a board decision.

It may ask about matters such as:

●      business ownership;

●      compensation relationships;

●      family interests;

●      vendor relationships;

●      property transactions; or

●      positions held with other organizations.

Annual disclosure is a useful governance tool and is specifically relevant to Form 990's governance questions.

It is not a universal federal requirement for every director of every nonprofit. Particular state laws may impose their own annual statement or certification rules.

Violations

A policy should address what happens when a covered person fails to disclose a relationship or does not follow the required procedure.

The organization needs a way to investigate what happened, determine whether corrective action is necessary, and reinforce consistent use of the policy without assuming that every failure is intentional wrongdoing.

Review and Updating

A conflict policy should remain aligned with the organization it governs.

Review may be appropriate when:

●      governing law changes;

●      the organization's leadership or governance structure changes;

●      new programs or financial relationships create recurring conflict issues;

●      experience reveals that a procedure is unclear or impractical; or

●      the written policy no longer matches how decisions are actually being made.

There is no universal rule requiring review every particular number of years. The stronger objective is appropriate periodic governance review, with updates when circumstances make them necessary.

What Happens When Someone Discloses a Conflict?

A useful conflict policy turns disclosure into a repeatable process.

One practical framework is:

Disclose → Determine → Manage Participation → Review → Decide → Document → Follow Up

1. Disclose

The interested person identifies the relationship or interest and provides the material facts the organization needs to understand it.

Disclosure should occur when the issue arises rather than waiting for the next annual questionnaire.

2. Determine

The appropriate decision-makers determine whether the disclosed situation constitutes a conflict under the organization's policy and any applicable law.

This step prevents the interested person from deciding alone whether their own relationship is harmless.

It also prevents the board from treating every connection as an automatic violation.

3. Manage Participation

The organization determines what role the interested person may have in the next stages.

That may include providing factual background and then leaving portions of the deliberation or vote.

The correct procedure depends on the policy, state law, governing documents, and transaction. “Recusal” should not be treated as one identical legal procedure in every jurisdiction.

4. Review

The decision-makers who are permitted to act evaluate the proposed arrangement.

Suppose a board is considering hiring a director's company.

The relevant questions may include whether the nonprofit needs the service, whether other providers are reasonably available, how the proposed price compares with the market, whether the terms are fair, and whether the arrangement serves the organization's interests.

For compensation, comparable salary information or other appropriate data may become important.

5. Decide

The authorized body makes the decision required by the applicable framework.

That decision might be to approve the proposal, modify its terms, postpone it while gathering more information, or reject it.

A disclosed conflict does not predetermine the outcome.

6. Document

Record the decision-making process while the information is fresh.

Contemporaneous minutes can show what was disclosed, who participated, what information was considered, and what action was taken.

Documentation becomes particularly important when a transaction is later reviewed by auditors, regulators, future board members, donors, or other decision-makers who were not in the room.

7. Follow Up

Some conflicts do not disappear after one vote.

A lease, employment relationship, recurring professional-services contract, or compensation arrangement may continue for years.

The organization should monitor continuing arrangements, update disclosures as facts change, and make sure future decisions are handled under the same governance process.

A conflict is not automatically wrongdoing—and disclosure does not automatically make a transaction lawful. The organization still has to determine which procedure and substantive rule apply.

Common Nonprofit Conflict of Interest Situations

The principles become easier to understand when applied to ordinary nonprofit decisions.

A Director's Company Is Proposed as a Vendor

Suppose a director owns a marketing company and the nonprofit is considering hiring it.

The relationship should be identified. But the board should not leap directly from disclosure to either automatic approval or automatic rejection.

The organization may need to determine whether a conflict exists, manage the director's participation, evaluate alternatives or market information, apply the appropriate state-law standard, and document why the arrangement is or is not in the nonprofit's interest.

Founder or Executive Compensation

A founder who also works as the organization's executive may legitimately perform substantial services.

The compensation decision can nevertheless create a conflict because the person receiving the compensation may also hold organizational influence.

Appropriate independent approval, comparability data, reasonableness review, and contemporaneous documentation can become particularly important. Depending on the organization and person involved, Section 4958 may also require additional consideration.

Ordinary disclosure alone should not be treated as a complete safe harbor.

A Director's Relative Is Being Considered for Employment

A spouse, child, sibling, or other relative is not universally prohibited from working for a nonprofit merely because a family member serves on the board.

The relationship does create a reason to examine who is making the hiring or compensation decision, whether the process is appropriately independent, whether the compensation is reasonable, and what state law or organizational policy requires.

Lease or Professional-Service Arrangement With an Insider

A nonprofit might have an opportunity to lease office space from a director or purchase legal, accounting, consulting, technology, or other professional services from someone connected to the board.

Again, “insider” does not automatically mean “prohibited.”

The organization may need to evaluate fair market value, alternative arrangements, the benefit to the nonprofit, applicable approval requirements, and whether another federal or state rule imposes additional restrictions.

A Director Serves Another Organization With Overlapping Interests

Serving two organizations can create a difficult loyalty question even when no money changes hands.

A broader conflict policy may require disclosure or establish procedures for competing organizational interests.

Form 990's particular conflict definition is narrower: competing duties to two organizations are not treated as a conflict for that question when no material financial interest or benefit is involved.

That does not prevent your board from addressing the situation as a governance matter.

And if overlapping relationships are apparent while you are still building the board, consider them as part of [how to choose a nonprofit board of directors] rather than waiting until the first difficult decision arises.

What Do Form 1023, Form 1023-EZ, and Form 990 Ask About Conflicts?

The three forms do not treat conflict policies identically.

Form 1023

The current Form 1023 instructions address conflict-of-interest policies and include a sample policy in Appendix A.

The sample is not mandatory language, and the instructions expressly state that adopting a conflict-of-interest policy is not required to obtain exempt status.

The application also examines matters beyond the policy itself, including compensation, relationships, and transactions involving officers, directors, trustees, and other relevant parties.

Form 1023-EZ

The current Form 1023-EZ materials reviewed in August 2026 did not contain a question asking whether the organization had adopted a conflict-of-interest policy.

Instead, the streamlined application asks about matters including compensation for officers, directors, or trustees and certain financial transactions involving those individuals or entities they own or control.

Form 1023-EZ therefore should not be described as requiring a conflict-policy attestation that the current materials do not contain.

For the broader differences between the applications, see [Form 1023 vs. Form 1023-EZ].

Form 990

Form 990 uses the most straightforward governance framework:

Policy → Disclosure → Implementation

The current form asks whether the organization has a written conflict-of-interest policy, whether specified leaders disclose potential conflicts annually or more frequently, and whether the organization regularly and consistently monitors and enforces the policy.

Answering “No” to one of these reporting questions does not automatically prove an Internal Revenue Code violation.

The framework does show why implementation matters. A nonprofit cannot reduce conflict management to obtaining signed annual forms and storing them in a file.

For broader annual reporting and governance obligations, see [maintaining nonprofit compliance].

State Law Can Change the Rules

The following states are illustrations, not a fifty-state survey.

They show why a national conflict-of-interest template cannot determine the correct procedure for every organization.

New York

New York provides one of the clearest examples of an actual statutory written-policy requirement.

For corporations covered by New York Not-for-Profit Corporation Law §715-a, the board must adopt and oversee implementation of and compliance with a conflict-of-interest policy, subject to the statute's qualifications.

The policy framework addresses matters including defining conflicts, disclosure, determining whether a conflict exists, participation restrictions, improper influence, documentation, and procedures for related-party transactions.

New York also requires directors of covered corporations to complete specified written statements before initial election and annually thereafter.

Related-party transactions receive additional statutory treatment. Depending on the transaction, the board or authorized committee may need to determine that the arrangement is fair, reasonable, and in the corporation's best interests, with additional procedures applying in specified circumstances.

Florida

Florida is another important example, particularly because its current statutory framework reflects relatively recent changes.

Florida Statutes §496.4055 applies to charitable organizations or sponsors required to register under the applicable charitable-solicitation framework. For those covered organizations, the board or an authorized committee must adopt a policy addressing conflict-of-interest transactions.

The law also requires annual certification of compliance by directors, officers, and trustees, with the certification connected to the organization's annual registration.

The scope qualification matters.

It would be inaccurate to reduce the rule to “every Florida nonprofit must have a conflict-of-interest policy.” Registration requirements and statutory exemptions affect which organizations are covered.

California

California demonstrates a different legal approach.

For nonprofit public benefit corporations, the state's self-dealing statute regulates transactions in which directors have specified material financial interests.

The framework shows why a conflicted transaction is not automatically synonymous with an illegal transaction. Depending on the circumstances, disclosure, good-faith independent review, fairness, organizational benefit, and consideration of alternatives can affect the analysis.

The state-specific legal procedure still needs to be followed.

Texas

Texas provides another reason to avoid universal statements about recusal.

Its nonprofit-corporation statute includes rules for certain transactions involving directors, officers, members, affiliates, and other interested parties. Disclosure, disinterested approval, and fairness can affect whether a transaction remains valid.

Texas law also does not mirror every participation rule found in the IRS sample. Under specified circumstances, an interested director may be treated differently for quorum, presence, participation, or voting purposes.

The lesson is not that one state's approach is preferable.

It is that your policy has to work with the law governing your organization and the transaction in front of it.

Conflict Policy, Annual Disclosure Form, and Bylaws Are Not the Same Thing

Several governance documents can touch the same conflict without performing the same job.

A conflict-of-interest policy defines the organization's process for identifying, disclosing, evaluating, and managing conflicts.

An annual disclosure statement gathers information about relationships or interests that could create conflicts during the year.

A transaction-specific disclosure alerts the organization when a particular matter actually arises.

Meeting minutes record how the board or committee handled that particular matter.

Your [nonprofit bylaws] serve a different function. They generally provide more durable governance architecture—such as board authority, meetings, voting, officers, committees, and amendment procedures.

Some organizations include conflict principles in their bylaws, while maintaining more detailed operational procedures in a separate policy, subject to applicable law and the organization's governing documents.

A policy does not replace bylaws, and bylaws do not eliminate the need to manage the actual conflict.

Can You Use a Nonprofit Conflict of Interest Policy Template?

Yes—as a starting point, not as proof of compliance.

The IRS's Appendix A sample can provide a useful structure. It covers concepts such as interested persons, financial interests, disclosure, conflict determination, participation, transaction review, records, compensation, annual statements, violations, and periodic review.

But the IRS itself makes clear that the sample does not prescribe one mandatory policy for every organization.

A template cannot independently determine:

●      whether New York, Florida, California, Texas, or another state's law applies;

●      which people your organization should cover;

●      how your governing documents allocate authority;

●      whether a director may participate in a particular stage of a decision;

●      whether a transaction is fair or reasonable;

●      whether compensation satisfies federal tax requirements; or

●      whether another rule prohibits or restricts the proposed transaction.

Templates become more useful when you understand what each provision is intended to accomplish.

An annotated policy can be especially valuable because it can distinguish among concepts such as core model provision, state-law check required, organization-specific choice, and optional governance provision.

If Association GC develops a separate annotated conflict-of-interest policy and annual disclosure form, that resource can be linked here after publication rather than embedding a supposedly universal policy in this article.

When a proposed transaction involves significant compensation, founder arrangements, substantial related-party interests, unusual governance, or state-specific requirements, the underlying issue may require more analysis than a generic template can provide.

Common Conflict-of-Interest Policy Mistakes

Adopting a Policy but Not Using It

A polished document in the governance records does not manage a board decision.

The process needs to be used when relevant transactions arise.

Treating the Annual Disclosure Form as the Entire Process

Annual questionnaires provide a useful snapshot.

They cannot capture every new employment relationship, business interest, family circumstance, contract, or financial arrangement that develops later.

Failing to Determine Whether a Conflict Actually Exists

Disclosure should trigger review.

It should not be treated as either automatic condemnation or automatic clearance.

Assuming Every Conflict Makes the Transaction Illegal

Some interested transactions may be permissible when the applicable substantive law and approval procedures are satisfied.

Others may be restricted or prohibited.

The policy should lead the organization to the correct analysis rather than predetermine the answer.

Assuming Disclosure Automatically Cures the Problem

Saying “I own the company” is not the same as demonstrating that a contract is lawful, fair, reasonable, properly approved, or in the nonprofit's interests.

Additional review may still be necessary.

Failing to Document the Decision

Years later, people may remember that someone disclosed a relationship without remembering who voted, what information was considered, or why the board approved the transaction.

Contemporaneous minutes reduce that uncertainty.

Copying a National Template Without Checking State Law

A policy based entirely on an IRS model may not reflect an applicable state's written-policy, related-party, self-dealing, voting, or documentation requirements.

Treating a Form 990 “Yes” Response as the Goal

The value of a conflict policy is not the ability to check a box.

Form 990 itself separates possession of the policy from disclosure and regular monitoring and enforcement.

The organization needs all of those governance layers to work in practice.

Frequently Asked Questions About Nonprofit Conflict of Interest Policies

Does a 501(c)(3) need a conflict-of-interest policy?

A written conflict-of-interest policy is not a universal federal prerequisite for obtaining 501(c)(3) recognition.

The IRS encourages appropriate conflict procedures, Form 1023 addresses the subject, and Form 990 asks certain organizations about written policies and their implementation. State law may independently require a policy for particular organizations.

What should a nonprofit conflict-of-interest policy include?

A policy commonly addresses who is covered, which interests should be disclosed, how conflicts are determined, how participation is managed, how transactions are reviewed and approved, what the minutes should document, annual disclosures, compensation matters, violations, and periodic review.

The exact provisions should reflect applicable law and the organization's governance structure.

Is a conflict of interest automatically illegal?

No. A conflict identifies a situation that requires analysis; it does not automatically establish misconduct or prohibit every transaction.

The organization still needs to determine what federal law, state law, governing documents, and its policy require. Some transactions may proceed after the required process, while others may be restricted or prohibited.

Can a nonprofit do business with a board member?

Potentially, depending on the transaction and applicable law.

The organization may need disclosure, appropriately independent review, consideration of fairness or reasonableness, compliance with state interested-transaction rules, and contemporaneous documentation.

Abstention alone should not be assumed to make every arrangement permissible.

Does every director need to complete an annual conflict disclosure?

Not as a universal federal rule.

Form 990 asks certain organizations whether specified leaders disclose relevant interests annually or more frequently, and the IRS sample includes an annual statement. Some states impose specific annual requirements for covered organizations. Your organization's policy may also choose to require recurring disclosures.

Can a conflicted board member vote?

The answer depends on applicable state law, the organization's governing documents, the policy, and the transaction.

The IRS sample and some state laws use nonparticipation procedures. Other state statutes treat presence, quorum, participation, or voting differently. One recusal procedure should not be assumed to apply nationwide.

What should meeting minutes say about a conflict?

The minutes should generally show enough of the process to document how the organization handled the matter.

Depending on the circumstances, that may include the interest disclosed, the conflict determination, who participated, relevant alternatives or comparability information, the vote, and the resulting decision.

Does Form 1023-EZ require a conflict-of-interest policy?

The current Form 1023-EZ materials reviewed in August 2026 did not contain a question asking whether the organization had adopted a conflict-of-interest policy.

The application instead includes questions involving compensation and specified financial transactions with officers, directors, trustees, and certain controlled entities.

Organizations using Form 1023-EZ remain subject to the substantive laws applicable to them even though the streamlined form does not ask the same conflict-policy question as the full Form 1023 process.

Build a Policy Your Board Can Actually Use

The strongest conflict policy is not measured by how many pages it contains.

Its value appears when a difficult decision reaches the board—whether a director has an interest in a proposed contract, compensation is being reviewed, or another insider transaction needs a decision. Everyone should understand what must be disclosed, who evaluates the issue, how participation is handled, what information the board needs, who makes the decision, and how the result is documented.

Those procedures also need to fit the law governing the organization rather than simply reproduce a national sample.

That is part of building a nonprofit that can continue making responsible decisions after its formation documents are filed and its federal status is recognized.

Learn more about Association GC's approach to [nonprofit formation services] and the governance structures that support an organization beyond launch.