Nonprofit Compliance: How to Navigate Related Party Transactions Legally and Ethically
May 27, 2025
Every nonprofit begins with a story—a desire to change the world, solve problems, help those in need, or build a community around a shared cause. As a nonprofit leader, the heart often leads when making decisions, guided by passion and purpose. But when it comes to financial decisions, especially those involving related parties, the head must guide the way too.
Imagine this scenario: You’ve founded a nonprofit dedicated to providing mobility aids to children with disabilities. You’ve poured everything into it—your time, savings, even your own garage to provide storage space for equipment. As your nonprofit grows, so does the community it serves. Eventually, you need a larger space to store donated equipment. Conveniently, a family member owns a warehouse nearby and offers to rent it to your nonprofit at a below-market rate. It seems like a win-win—affordable rent and a trusted supporter.
But then you recall a nonprofit financial seminar that mentioned “related party transactions” and how they could jeopardize donor trust, or even your tax-exempt status if not handled properly. Could something so well-intentioned be considered a misstep? Could one transaction really put the nonprofit at risk?
Understanding Related Party Transactions
So, what exactly is a related party transaction?
Related party transactions are any deal or arrangement between a nonprofit and someone closely connected to the organization—such as board members, officers, key employees, family members, businesses they control, or significant donors with influence over the organization. Common examples of these transactions include:
- Leases
- Sales or purchases of goods or services
- Grants and contributions
- Loans
- Consulting agreements
- Compensation arrangements
- Shared facilities or services
These arrangements aren’t automatically unethical or illegal. In fact, they often begin with good intentions, like the scenario above. But they raise important concerns around conflicts of interest, fairness, and public perception. The IRS and state regulators scrutinize these transactions, and donors expect transparency.
Can a Nonprofit Have a Related Party Transaction?
Yes—if strict guidelines are followed.
In the scenario above, the nonprofit did things right. The proposed warehouse lease was brought before the organization’s full voting board. The founder disclosed their relationship with the warehouse owner and abstained from all discussion and voting related to the warehouse lease. The rest of the board independently assessed the lease and obtained quotes from other local properties to confirm that the rent was fair, and it reflected an arm’s-length transaction. Every step including the rational for entering into the related party transaction and the best interest of the nonprofit was documented, and the organization board had a robust Conflict of Interest Policy in place.
The result? A sound financial decision that met compliance standards and preserved public trust.
How to Handle Related Party Transactions as a Nonprofit
Pro Tip: Even if your intentions are pure, perceived conflicts of interest can damage donor trust. Being proactive and transparent protects both your nonprofits’ mission and reputation.
- Identify the Relationship
- Ask: Is this person or business related to a board member, officer, key employee, or founder?
- Examples: family members, spouses, businesses controlled by insiders.
- Disclose the Relationship
- Bring the potential transaction to the full board or governing body.
- The involved party must disclose their relationship and abstain from all voting and decision-making.
- Comparable Data
- Get 2–3 quotes from unrelated third parties to ensure pricing is fair and reasonable, reflecting an arm’s-length transaction.
- Keep records of all quotes or appraisals.
- Document Everything
- Record meeting minutes, votes, and how the decision was reached.
- Note how the transaction supports the nonprofit’s mission and why it’s in the best interest of the organization.
- Follow Your Conflict-of-Interest Policy
- Ensure your policy is current and aligns with IRS Form 990 disclosure requirements.
- Require board members to sign annual conflict of interest statements.
- Report It Properly
- Report significant related party transactions on IRS Form 990, Schedule L.
- This includes total annual payments over $100,000, any single transaction over the greater of $10,000 or 1% of revenue, compensation over $10,000 to family members of officers/directors, and certain joint ventures where both the organization and an interested person have significant interests.
- If unsure, consult your CPA or legal advisor.
- Monitor the Arrangement
- Periodically reassess the transaction to ensure it remains fair and beneficial.
- Be prepared to adjust or end the relationship if it no longer aligns ethically or financially to the organization’s mission.
Final Thoughts
If you’re a nonprofit leader wondering whether a related party transaction is okay, you’re not alone. The best decisions come from a place of integrity, guided by transparency, strategy, and a commitment to your mission.
By following clear steps and involving your board and advisors, you can turn complex decisions into opportunities to strengthen credibility, deepen donor trust, and position your nonprofit for sustainable success.
At Larson & Company, we believe ethical choices and forward-thinking guidance are the foundation of lasting impact. If you’d like help reviewing or structuring a related party transaction, our nonprofit professionals are here to help—because doing good should never come at the cost of compliance.
Contact us today for additional information! Larson and Company has developed a suite of services specifically to serve the needs of nonprofit organizations of all sizes.
Sources
https://www.irs.gov/pub/irs-pdf/i990sl.pdf
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