There can be a tendency for entrepreneurs making their initial foray into the not-for-profit (NFP) space to draw parallels and comparisons with their experiences and knowledge from the for-profit space. In some cases, these parallels can be time-saving mental heuristics. In many more cases, these comparisons can actually hurt your not-for-profit because they may not be entirely true.

One such distinction that could trip you up is that a for-profit company can pay its directors some form of remuneration in the form of cash or shares. It seems natural to compensate someone for their time, skills and experience after all, not to mention the exposure to liability flowing from the added duties of a director (e.g. duty of care, fiduciary duty). In NFPs however, paying directors for their role as a director is often expressly forbidden. This is because the NFP cannot be a vehicle for the personal benefit of its directors or members.

If you want to get technical, a director who does some other work for the NFP that is not a typical duty of a director such as designing the company’s website, can receive compensation for doing so. However, once you start compensating directors in this manner, tread carefully! The compensation offered for performing such non-directorial tasks must be a fair wage for the kind of task being performed. No portion of the director’s wage for that task should depend on their role as a director (e.g. don’t offer a premium rate of pay to a director which is well above the market-rate for a similar task).

Always keep optics in mind when you decide to pay a director for non-directorial work. The more it looks like the directors are using the NFP as a means to personally benefit, the more likely the NFP is to be investigated by government authorities. For example, an NFP with a small board of directors that has engaged most of its directors to perform non-directorial work for the company in exchange for a wage is extremely likely to attract government scrutiny because it seems as if it hires only from among its directors, or is using a technicality to bypass the rules about not paying directors.

TAKEAWAYS:

  • You cannot pay your NFP directors for their role as a director!
  • Directors can be paid for doing non-directorial work (e.g. web design) but this can be risky
  • Only hire directors for non-directorial work as a last resort, so it does not seem that your NFP exists for the profit of its directors.

 

Author: Alayna R. Kolodziechuk

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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