I heard that on a board of directors for a non profit 501c3, you are
allowed to give salaries to members of the board as long as the
majority of the board is not compensated by the non profit in any way
whatsoever. Therefore, it would be perfectly legal to have 3 salaried
board members(including the executive director) and 4 or more non
salaried board members. Is this true? I need official evidence that
this is allowed as of 2006 in the state of California. Thanks

Dear brianhlee,

The current California laws governing nonprofit corporations do not at
all demand that all or some directors of a such corporation serve
without compensation. The California Corporations Code, Division 2,
even indirectly allows payment of compensations to the directors:

"The bylaws may contain any provision, not in conflict with law
or the articles, for the management of the activities and for the
conduct of the affairs of the corporation, including but not limited
to: (...) The qualifications, duties and compensation of directors"

This can be found in the law's regulations concerning Nonprofit Public
Benefit Corporations (Section 5151 c 3); Nonprofit Mutual Benefit
Corporations (Section 7151 c 3); Nonprofit Religious Corporations
(Section 9151 c 3). But at no point do the current laws of California
demand that the directors of a nonprofit corporation, or the majority
of the directors, shall not be paid any compensation, and neither did
I find a such law anywhere else in the California Code.

On Federal level, no such rule exists either. Nothing like it is not
mentioned in Section 501(c)3 of the Internal Revenue Code, and it is
not known to the IRS. The IRS is just interested in whether
compensation of the directors of a nonprofit corporation is
"reasonable" when determining if the corporation may claim tax
exemption.

Regards,
Scriptor




Sources:

Legislative Counsel of California: California Corporations Code
http://www.leginfo.ca.gov/cgi-bin/calawquery?codesection=corp&codebody=

Legislative Counsel of California: California Law
http://www.leginfo.ca.gov/calaw.html

California Business Portal: Organization Of Domestic Nonprofit,
Nonstock Corporations
http://www.ss.ca.gov/business/corp/corp_artsnpinf.htm

IRS: Application for Recognition of Exemption under Section 501(c)(3)
of the Internal Revenue Code
http://www.irs.gov/pub/irs-pdf/f1023.pdf

Legalzoom: Directors and Officers of the Non-Profit Corporation
https://www.legalzoom.com/law_library/non-profit/Directors-and-Officers-of-the-Non-Profit-Corp.html

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Request for Answer Clarification by brianhlee-ga on 16 Oct 2006 23:48 PDT

Thanks for your prompt answer. To clarify my question, I was concerned
about California corporation code 5227 which more clearly states my
question's concerns. It does mention that I cannot have the majority
of the board be compensated. is that right?

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Clarification of Answer by scriptor-ga on 18 Oct 2006 09:29 PDT

Dear brianhlee,

I have examined Section 5227 of the current version of the California
Corporations Code, and I understand what the reason of your concerns
are . As I see, the section says:

"Not more than 49 percent of the persons serving on the board of any
corporation may be interested persons. (...) For the purpose of this
section, "interested persons" means either: Any person currently being
compensated by the corporation for services rendered to it within the
previous 12 months, whether as a full- or part-time employee,
independent contractor, or otherwise,
excluding any reasonable compensation paid to a director as director."

I shortened the paragraph a bit to make its meaning clearer. As you
see, it says: "EXCLUDING any reasonable compensation paid to a
director as director." This means, the reasonable compensation a
director receives for serving as a director is not considered
compensation in the context of this section. One could also put it
this way: "Not more than 49% of the board members may be interested
persons. Interested person means anyone who receives payment from the
corporation, excluding the compensation the directors receive."

As you see, the law does not demand that the majority or any of the
directors get no compensation; it only demands that the majority of
the directors does not receive any other form of payment from the
corporation.

Regards,
Scriptor