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About Form 990: Independence and Relationships of the Governing Body

When completing Form 990 for your nonprofit organization, it is important to report the correct number in the governing body.  By definition, the governing body is the group of persons authorized under state law to make decisions on behalf of the organization.  The governing body is, generally speaking, the board of directors or trustees.  All of the directors or trustees must maintain independence in order to participate in the decision-making process.

The number of directors to be reported on Page 1 and Page 6 Section A of the Form 990 is the total number of members of the governing body as of the end of the organization’s tax year who have the power to vote on all matters that may come before them.  Anyone who does not participate in the actual decision-making for the organization is not part of the governing body.  Therefore, advisory boards and committees and other trusted advisors of the organization are not part of the governing body.

Determining Independence

Independent voting members of the organization’s governing body are those members who:

  • Are not compensated as an officer or other employee of the organization or of a related organization, 
  • Did not receive total compensation or other payments exceeding $10,000 during the organization’s tax year from the organization or from related organizations as an independent contractor, and
  • Were not involved in a transaction with the organization either directly or indirectly through affiliation with another organization that would be required to be reported on Schedule L.

Transactions that would be required to be reported on Schedule L include excess benefit transactions, loans, grants to interested persons, and business transactions.  Learn more about these items in, “About Form 990 Schedule L – Excess Benefit Transactions."

A member of the governing body is not considered to lack independence merely because:

  • The member is a donor to the organization, regardless of the amount of the contribution or
  • The member receives financial benefits from the organization solely in the capacity of being a member of the charitable class serviced by the organization in the exercise of its exempt function.

The organization need not engage in more than a reasonable effort to obtain the necessary information to determine the independence of members of the governing body and may rely on information provided by such members.

Family or Business Relationships

Although family and business relationships do not negate independence, the organization is still required to disclose any such relationships among the members of the governing body or between any of those members and the organization. 

Family relationships are ancestor/descendant and siblings including spouses.

A "business relationship" between two people on the governing body includes any of the following:

  • One person is employed by the other in a sole proprietorship or by an organization with which the other is associated as a trustee, director, officer, key employee, or greater-than-35% owner.
  • One person is transacting business with the other (other than in the ordinary course of either party’s business on the same terms as are generally offered to the public), directly or indirectly, in one or more contracts of sale, lease, license, loan, performance of services, or other transaction involving transfers of cash or property valued in excess of $10,000 in the aggregate during the organization’s tax year.
  • The two persons are each a director, trustee, officer, or greater than 10% owner in the same business or investment entity.  There may be ownership through multiple tiers of entities.

A "business relationship" does not include a relationship between:

  • Attorney and client, 
  • Medical professional and patient, or
  • Priest/clergy and penitent/communicant

The organization is not required to provide information about a family or business relationship between two officers, directors, trustees, or key employees if it is unable to secure the information after making a reasonable effort to obtain it.  One way to make a reasonable effort is to make it part of the conflict of interest questionnaire that is required of these people each year.

When reporting the number of directors, it is important to consider independence, family and business relationships.

For more information on Form 990, post a comment below or contact our Tax Planning & Preparation Group at 440-449-6800.

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