The IRS is aware that a number of nonprofits try to skirt the laws that govern 501(c )(3) exempt organizations and the compensation of founders. By their own analysis, "…those in control may not, by reason of their position, acquire any of the charitable organization’s funds. If funds are diverted from exempt purposes to private purposes, exemption is in jeopardy." This means that founders cannot receive funds or other payments. "Those in control of an organization may not withdraw its earnings under the guise of salary payments.” These types of kickbacks may take the form of inadequately secured loans, property received at a price that is less than fair market value, fringe benefits, or even personal grants. Founders on nonprofits do no receive a salary, and it is vital that they are careful in how and when they receive reimbursement.[i]
Founders of NPOs must keep the law in mind at all times to avoid illegal compensation, conflicts of interest that could jeopardize petitions to the IRS, or other illegal activities. With an honest and accurate assessment, a new entrepreneur can genuinely evaluate the level of involvement to which he or she is willing to commit.
[i] The IRS defines Incidental Private Benefit: "To be incidental, the private benefit must be a necessary concomitant of the activity which benefits the public at large and accomplishes exempt purposes. In other words, the benefit to the public cannot be achieved without necessarily benefiting certain private individuals." Also, "Further, private interests must be benefited only to the extent necessary to accomplish exempt purposes. It is a facts and circumstances test in that public benefit from the organization’s activities must outweigh any individual benefit." – IRS Publications, online. http://www.irs.gov/irm/part7/ch10s04.html
