What Nonprofits Need to Know About Related Party Transactions

September 15, 2026

Article Summary

Related party transactions are not inherently inappropriate, but nonprofits must ensure these transactions are fair, reasonable, transparent, and in the organization’s best interests.
Related parties can include board members, officers, key employees, family members, and businesses or organizations they own or control.
Strong governance is essential when related party transactions occur, including written conflict-of-interest policies, disclosure requirements, recusal procedures, and independent board oversight.
Nonprofits may need to disclose related party transactions in their financial statement notes and, in certain circumstances, on IRS Form 990 and Schedule L.
Thorough documentation and market comparisons help protect the nonprofit, demonstrating that transactions were appropriately reviewed, conducted at arm’s length, and designed to benefit the organization rather than an insider.

Nonprofits are built on public trust. Donors, grantors, volunteers, and community members expect organizations to use resources responsibly and make decisions in the best interest of their mission. For that reason, related party transactions receive special attention from boards, auditors, regulators, and the IRS.

While related party transactions are not inherently inappropriate, they require transparency and careful oversight. Understanding what constitutes a related party and how to properly manage these transactions is an important component of good nonprofit governance.

What Is a Related Party?

A related party is an individual or organization that has a close relationship with a nonprofit and may be able to influence, or appear to influence, the nonprofit's decisions.

Examples of related parties include:

Board members.
Officers and key employees.
Family members of board members and executives.
Entities owned or controlled by board members, officers, or their families.
Organizations under common control or significant influence.

In simple terms, if someone involved with the nonprofit stands to benefit personally from a transaction with the organization, a related party transaction may exist.

Common Examples of Related Party Transactions

Related party transactions occur frequently in the nonprofit sector. Some common examples include:

Renting office space from a board member.
Purchasing goods or services from a company owned by a director.
Hiring a relative of a board member.
Receiving or making loans involving officers or directors.
Receiving significant donations from organizations controlled by board members.

In many cases, these transactions arise because board members and donors are deeply invested in the organization's success. The existence of a related party transaction does not automatically indicate wrongdoing.

The key question is whether the transaction is fair, reasonable, and in the best interest of the organization.

Why Do Related Party Transactions Matter?

Related party transactions receive heightened scrutiny because they can create real or perceived conflicts of interest.

When insiders benefit from a nonprofit's decisions, stakeholders may question whether the organization acted objectively. Even if a transaction is entirely appropriate, poor documentation or lack of transparency can damage donor confidence.

The IRS specifically encourages nonprofits to adopt conflict-of-interest policies because conflicts can lead to private benefit or excess benefit concerns. According to IRS guidance, organizations should have procedures requiring disclosure of conflicts and recusal from decision-making when conflicts exist.

From an auditor's perspective, related party transactions often represent areas of increased risk because they may not occur on the same terms that would exist between unrelated parties.

Where Are Related Party Transactions Reported?

Financial Statements

Under U.S. GAAP, significant related party transactions must be disclosed in the notes to the financial statements. Disclosures typically include:

The nature of the relationship.
A description of the transaction.
Dollar amounts involved.
Amounts due to or from related parties at year-end.

The objective is to help financial statement users understand how related relationships may have affected the organization's financial position and results of operations.

A typical disclosure might describe contributions received from companies affiliated with board members, payments made to organizations connected to directors, or amounts owed between related organizations.

Form 990

Related party transactions may also need to be reported on Form 990, including Schedule L in certain circumstances. Schedule L is used to report specific transactions between the organization and interested persons, including loans, business transactions, grants, and excess benefit transactions.

The IRS also asks organizations whether they maintain a written conflict-of-interest policy and whether directors, officers, and key employees are required to disclose potential conflicts.

Best Practices for Nonprofits

A nonprofit does not need to avoid every related party transaction. Instead, it should establish safeguards that demonstrate the organization is acting in its best interests.

Adopt a Strong Conflict-of-Interest Policy

Every nonprofit should maintain a written conflict-of-interest policy that:

Defines conflicts of interest.
Requires annual disclosures.
Establishes procedures for evaluating transactions.
Requires recusal from discussions and voting when conflicts exist.

Many governance experts consider this one of the most important policies a nonprofit board can adopt.

Require Full Disclosure

Board members and executives should disclose all relevant relationships before a transaction is considered. Transparency is essential. The board cannot evaluate a conflict it does not know exists.

Document the Decision-Making Process

Meeting minutes should document:

The disclosure of the conflict.
The interested person's recusal.
The board's discussion.
The basis for concluding the transaction is fair and beneficial to the organization.

Good documentation often becomes the nonprofit's strongest defense if questions arise later.

Compare Market Alternatives

Whenever practical, nonprofit leaders should obtain competitive bids, quotes, or other evidence showing that the terms are comparable to what an unrelated party would offer.

This helps demonstrate that the transaction was conducted at arm's length and in the organization's best interests.

Review Transactions Annually

Related party relationships can change over time. Annual conflict-of-interest questionnaires and periodic board reviews help ensure relationships remain properly identified and disclosed.

Final Thoughts

Related party transactions are a normal part of nonprofit operations, particularly in organizations where dedicated board members, donors, and volunteers are actively involved in supporting the mission. The presence of a related party transaction is not a red flag by itself. The real issue is governance.

When a nonprofit has strong conflict-of-interest policies, transparent disclosures, independent board oversight, and thorough documentation, related party transactions can be managed responsibly while preserving public trust. By focusing on transparency and accountability, nonprofits can protect both their mission and their reputation.

Frequently Asked Questions About Related Party Transactions

What is a related party transaction for a nonprofit?
A related party transaction occurs when a nonprofit conducts a financial or business transaction with an individual or organization that has a close relationship with the nonprofit, such as a board member, officer, key employee, family member, or an entity they own or control.

Are related party transactions allowed for nonprofits?
Yes. Related party transactions are not automatically prohibited. However, nonprofits should ensure that transactions are fair and reasonable, serve the organization's best interests, and are properly disclosed, reviewed, and documented to avoid conflicts of interest or private benefit concerns.

What are common examples of nonprofit related party transactions?
Common examples include renting property from a board member, purchasing services from a company owned by a director, hiring a board member's relative, making or receiving loans involving insiders, and receiving significant contributions from organizations controlled by board members.

How should a nonprofit manage a related party transaction?
A nonprofit should require disclosure of the potential conflict, have the interested individual recuse themselves from discussions and voting, evaluate whether the transaction is fair and reasonable, consider competitive bids or market alternatives when practical, and document the board's decision-making process in meeting minutes.

Where are nonprofit related party transactions reported?
Significant related party transactions may need to be disclosed in the notes to a nonprofit's financial statements. Certain transactions involving interested persons may also be reported on IRS Form 990, including Schedule L, depending on the nature and circumstances of the transaction.

For additional guidance, please reach out to the Larson Nonprofit Team.