Posted on Wednesday, February 26, 2014
A related party is an entity or individual that can control or significantly influence your nonprofit organization. Thus, there is some type of inter-linking relationship between the individual and the nonprofit organization.
Common related parties of nonprofits:
- Management and their immediate family
- Board members and their immediate family
- Entities whose officers or directors are also members of the organization’s board of directors
- Brother-sister affiliated entities
- National and local affiliates
- Significant contributors (if they can significantly influence management)
Transactions with related parties should be disclosed to the governing board and evaluated to ensure the transaction is made in the best interest of the organization. Related party transactions must also be disclosed on Schedule L, Transactions with Interested Persons, of Form 990 or Form 990-EZ. In addition, any material related party transactions (other than compensation arrangements, expense allowances and similar items occurring in the normal course of business) should be disclosed in the organization’s financial statements. The disclosure should include the nature of the relationship, a description of the transaction, dollar amount of the transaction and any amounts due from or to the related party.
Common transactions with related parties:
- Purchases of goods or services from board members
- Payments to or receipts from affiliates
- Office space leased from or donated by board members or related entities
- Guaranteed or pledged personal assets by board members
In order to identify possible related party transactions, consider implementing a conflict of interest policy that requires all board members and management to annually identify these types of relationships.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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