Q: What are "Unqualified" individuals?

Published: Sunday, 04 February 2018

The IRS is pretty clear about individuals they'd like to see - and not see...serving on your nonprofit organization. They don't need to be rocket scientists, have a degree, or be a genius, but they should be qualified to advise the board on the purposes for which the board was organized.

They also should be involved in the management of the board and advise the organization staff on day-to-day operations. That's not to say they should be running the organization - but advising the staff who do run the organization, and being materially-involved, is important. If they don't know what's up, how can they serve and advise on your board?

Additionally, the IRS has specified those individuals they do NOT want to see serving on a nonprofit organization's board of directors, and those individuals are called "disqualified individuals."

Based on the IRS, their specifications are as follows:

"Disqualified individual, for purposes of the requirements regarding composition of the gov­erning body and officers of an exempt operating foundation, means any of the following:

I.  A substantial contributor,
II. An owner of more than 20 percent of--
    a. The total combined voting power of a corporation,
    b. The profits interest of a partnership, or
    c. The beneficial interest of a trust or unin­corporated enterprise, which is a substantial contributor to the foundation, or a          member of the family of any individual described in (1) or (2).

Indirect ownership of stock in a corporation, profits interest in a partnership, or beneficial interest in a trust or unincorporated enterprise is taken into account for determining a disqualified individual under (2) above, according to the rules explained under Attribution of ownership."

So if someone wants to contribute a large sum of money to your organization - they should NOT serve on your board, because they would have the ability to leverage too much influence on voting and on the other members of the board.

The IRS doesn't say BOD officers and members cannot contribute - they can - but just not more than 20% of a, b, and c above.

Also - if one has an interest in a corporation of "for profit" company that contributes to the nonprofit, tax-exempt corporation, then that person would also be able to use undue influence on other members of the board, and they should not serve on the board of directors.