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May a nonprofit youth sports club purchase all the equipment and uniforms from the president’s sporting goods store, and can a director run the concession stand as his own profitable business?

It is obviously a conflict of interest situation when a nonprofit deals with its own officers or directors, although not necessarily illegal.  The key is whether the transaction is fair to the organization.  If the president supplies the equipment and uniforms at cost or a substantial discount, for example, it may be a good deal for the organization.  Any such relationship ought to be reviewed by independent members of the board to assure that is fair and that you can’t do significantly better elsewhere.  It is important to protect the president from a charge of excess benefit and to be able to explain the deal when you report it as a related party transaction on your tax return.  (See Ready Reference Page:  "Charities Must Avoid Excess Benefits.”)

The concession stand raises other questions of corporate opportunity.  Why is the team not running the stand and keeping the profit for itself?  If someone else is going to do it, should you bid the opportunity?  Shouldn’t you at least be obtaining a royalty?  The same excess benefit transaction issues arise here as with the equipment. 

Without knowing that these deals are the best that you can get, they probably don’t pass the “smell test.”

May 27, 2009

Article Archives >> To the Point

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