The practice of providing loans to board members and executives, while infrequent, has created both real and perceived problems for public charities. While there may be circumstances in which a charitable organization finds it necessary to offer loans to staff members, there is no justification for making loans to board members. Federal laws prohibit private foundations, supporting organizations and donor-advised funds from making loans to substantial contributors, board members, organization managers and related parties. Many states
also forbid such loans or allow them only in very limited circumstances.

• Providing loans to executives and board members creates real and perceived problems.
• Loans should not be made to board members under any circumstances. 
• In general, loans to employees, particularly key employees, should be reviewed and understood by the board and subject to the board’s approval. 
• The funds of the organization should be used to advance the mission of the organization.
  

• Some state laws prohibit loans to board members and officers.
• IRS self-dealing rules prohibit loans by private foundations to board members or officers. 
• IRS Form 990 requires disclosure of loans made to directors, officers, or key employees. Such loans, if permitted under state law, should be at market rates and approved by the board.

Federal laws prohibit private foundations, supporting organizations, and donor-advised funds
from making loans to disqualified persons.¹ The Revised Model Nonprofit Corporation Act states that a nonprofit corporation “may not lend money to or guaranty the obligation of a director or officer of the corporation,”² and most states allow such only in very limited circumstances

Charitable organizations must report any loans to current and former officers, directors, trustees, key employees, and other “disqualified persons” on their annual information returns (Form 990 and 990-PF). For public charities permitted to make such loans, the IRS generally scrutinizes the transactions to determine whether they qualify as a true loan or some other type of payment. In making its determination, the IRS examines information reported on the Form 990, including the maturity date of the loan, repayment terms, the interest rate charged, any security or collateral provided by the borrower, and the purpose of the loan. The IRS also expects that the organization maintain and be able to provide written documentation of the loan. The financial benefit of a loan that is provided at below-market interest rates must be added to the borrower’s other compensation to determine if the total qualifies as an excess benefit transaction. Any payment that is not determined to be a loan may automatically be treated as an excess benefit transaction.³

1. Why is it considered bad practice for a charitable organization to make loans to staff or board members? 
2. Do we understand what federal and state laws apply to our organization in regard to making loans? 
3. Do our bylaws expressly forbid making such loans, and if not, should we consider amending them to that effect?

1 Laws and Regulations

20 Board Compensation