Serving as an officer, director, trustee, elder, or pastor of a church comes with certain responsibilities. The most important of which is acting in good faith in the best interest of the church. In short, when servicing is such a position on the church council/board, one must not act in their interest at the expense of the church by usurping a corporate opportunity, having an interest in a particular transaction, or competing with the corporation to advance one’s personal interest.
Conflicts of interest often arise when entering into a transaction or financial arrangement that might benefit an individual as opposed to the congregation as a whole. These situations often arise when an individual can influence a decision resulting in a benefit to that person, their business interest, a friend, or relative.
When an individual receives a financial or other personal consideration which compromises their objectivity or judgment in such a manner that it can not be discerned whether they are acting in their best interest or the church’s. This occurs when an individual and the church have competing interests that clouds one’s ability to act in good faith. In connection with any conflict of interest, an interested person must disclose the existence of the financial interest and be allowed to disclose all material facts.
Potential/ Perceived Conflict:
A potential conflict may not be an immediate or actual conflict at a given time but may result in either a direct or indirect financial interest or some other benefit in the future. A board member’s conflict of interest may expose the entire board to liability.
When in doubt, a board may rely on information prepared or presented by advisory committees, so long as they are exclusively composed of (i) officers and employees of the corporation, (ii) people with relevant professional expertise (e.g., attorneys and accountants), and/or (iii) other directors. Practically, this eliminates one facet of liability concern for directors and enables nonprofit corporations to have more diverse and competent advisory committees, especially when certain technical expertise may be necessary or desired.
Create a conflict of interest policy that outlines procedures for when a possible conflict exists between personal interests and the interests of the church. A policy should require those with an actual or perceived conflict to disclose this information and prohibit interested board members from voting on such matters and how that conflict will be dealt with.
Acting in good faith requires one to disclose all actual, potential, and perceived conflicts with the board/council where the director, officer, or employee reports as to whether he or she, or any related individual or entity, has a financial interest in any vendor of goods or services to, or recipient of goods or services from, the church. A pastor’s compensation is an excellent example when they also serve on the board. The board meeting minutes should include the comparability data and note that the pastor recused himself/herself from any vote involving their compensation. These minutes should be included in the church/corporate records to avoid any appearance of improprieties.
These minutes should be included in the church/corporate records to avoid any appearance of improprieties.
IRC section 501(c)(3) states that an organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a non-profit organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.
Transparency is key. When in doubt, abstain from any discussions and/or votes.
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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax, or other professional services. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.