What a conflict of interest is
A conflict of interest arises when a board member, officer, or key employee — or a close family member — could benefit personally from a decision the organization makes. Classic examples: the board considers hiring a member's company, leasing space from a director, or approving compensation for someone who's also voting. A conflict isn't automatically wrong; the problem is an undisclosed conflict, or a conflicted person influencing the decision.
This is a direct expression of the board's duty of loyalty — putting the organization's interest ahead of personal gain. See board governance basics for the three fiduciary duties.
Why the IRS expects a policy
While federal law doesn't strictly mandate a conflict-of-interest policy, the IRS treats it as a marker of good governance. Form 1023 — the application for 501(c)(3) status — asks whether you've adopted one and even includes a sample policy in its instructions. Each year, Form 990 Part VI asks the same question publicly. Answering "yes" is easy and expected; answering "no" invites scrutiny from regulators and funders alike. See how to get 501(c)(3) status for where this fits in the application.
Required elements of the policy
A workable policy covers six things. The IRS sample policy includes all of them.
- Definition & scope — what counts as a conflict and who's covered (directors, officers, key staff, and their family members).
- Duty to disclose — covered persons must promptly disclose any actual or potential conflict.
- Recusal procedure — a conflicted person leaves the discussion and abstains from the vote.
- Review by disinterested members — the remaining board decides whether the transaction is fair and in the organization's best interest, considering alternatives.
- Documentation — the minutes record the disclosure, the recusal, and the decision.
- Annual disclosure statement — every covered person signs a written statement each year affirming they've read the policy and listing any conflicts.
The disclosure & recusal process
When a conflict comes up at a meeting, the process is short and consistent:
- Disclose. The affected member states the nature of the conflict before any discussion.
- Step back. They answer questions if asked, then leave the discussion of that item.
- Recuse from the vote. The member abstains; only disinterested members vote.
- Document. The minutes record the disclosure, the recusal, and the decision and vote.
Why recusal protects everyone
A documented recusal protects the individual from any appearance of self-dealing and protects the organization's tax-exempt status. The cleanest defense against a "private benefit" question from the IRS or a funder is a minute that shows the conflicted person left the room.
The annual disclosure
Once a year — usually at the first meeting of the fiscal year — every director, officer, and key employee signs a conflict-of-interest disclosure statement. It confirms they've read the policy and discloses any relationships that could create a conflict. Collect them, file them with your records under your document-retention policy, and note the review in the annual compliance checklist.
Grab the conflict-of-interest template and approve it next session
You don't have to draft this from scratch. Our template library includes a ready-to-adopt conflict-of-interest policy and annual disclosure form your board can approve in a single meeting — one more "yes" on your Form 990 and one less thing for a funder to worry about. And while you tighten governance, Good Circles can add recurring, unrestricted income — about $72 per active supporter per year (≈ $36,000/year from 500 supporters), free to join. (A Main Street–first marketplace launching September 2026.)
Claim a Founding Nonprofit spot →Conflict-of-interest readiness
- The board has formally adopted a written policy
- Every director and key employee signed this year's disclosure
- The recusal procedure is understood and used
- Minutes document each disclosure and recusal
- You can answer "yes" on Form 990 Part VI
Sources & tools
Free first
- IRS — Instructions for Form 1023, Appendix A: Sample Conflict of Interest Policy — The IRS's own model conflict-of-interest policy (Appendix A) that most nonprofits adopt or adapt verbatim.
- IRS — Form 1023: Purpose of Conflict of Interest Policy — Explains why the IRS asks about the policy and how disclosure-and-recusal procedures protect exempt status.
- BoardSource — Conflict of Interest for Nonprofits — Governance authority's guidance on annual disclosure forms, recusal, and managing real vs. perceived conflicts.
- National Council of Nonprofits — Conflict of Interest Policies — Practical explainer on adopting, disclosing under, and enforcing a conflict-of-interest policy, with sample-form links.
Paid — optional labor-savers
- BoardEffect — Board Management Software — Collects and stores annual conflict-of-interest disclosures and recusal records inside a secure board portal. Worth it when Your board is large enough that tracking signed annual disclosures by email has become unreliable.
- Boardable — Board Portal — Centralizes policy acknowledgments, e-signed disclosure forms, and meeting minutes documenting recusals. Worth it when You want an audit trail that directors actually signed the policy and disclosed each year.
Last verified 2026-06-16. Figures and rules change — verify at the source before you act.
FAQ
Does a nonprofit have to have a conflict-of-interest policy?
It's not strictly required by federal law, but the IRS strongly expects one. Form 1023 asks whether you've adopted a conflict-of-interest policy, and Form 990 asks the same each year. In practice it's standard for any credible nonprofit, and funders look for it.
What should a conflict-of-interest policy include?
A definition of a conflict and who's covered, a duty to disclose, a recusal procedure, review by the disinterested board members, documentation in the minutes, and an annual signed disclosure statement from every board member and key employee.
What is recusal?
Recusal means a conflicted member leaves the discussion and abstains from the vote on that matter. The remaining disinterested members decide, and the minutes record the disclosure, the recusal, and the decision — protecting both the individual and the organization.