A conflict of interest policy is a governing document that requires board members and key staff to disclose personal or financial interests that could influence their decisions on behalf of the organization. Texas nonprofits seeking or maintaining 501(c)(3) status are expected by the IRS to have one in place, and the absence of a written policy is a red flag during audits and grant reviews. Without it, your organization faces real exposure, including loss of tax-exempt status, board liability, and reputational harm. If your Texas nonprofit has a policy on paper but hasn’t put it into regular practice, that’s a problem worth addressing now.
Does Texas Law Require Nonprofits to Have a Conflict of Interest Policy?
Texas law does not explicitly mandate a conflict-of-interest policy in the same way it requires other governance documents, but the IRS does. When a nonprofit files Form 990, it asks directly whether the organization has a written conflict-of-interest policy and whether board members are required to disclose conflicts of interest annually. Answering “no” to either question puts your tax-exempt status under scrutiny.
Beyond the IRS, many foundations and government grant programs require a documented policy before awarding funds. A board that cannot produce one on request may lose a grant opportunity or trigger a compliance review. The practical consequences of not having a policy are often more immediate than the legal ones.
What Should a Nonprofit Conflict of Interest Policy Include?
A well-drafted policy creates a repeatable process for identifying, disclosing, and managing conflicts before they cause damage. At a minimum, your policy should address the following:
- Who it covers: Board members, officers, and key employees should all be named explicitly. Volunteers with financial decision-making authority may also need to be included.
- What must be disclosed: Any personal, financial, or family interest that could influence a vote or decision. This includes vendor relationships, real estate interests, and employment ties.
- Recusal procedures: When a conflict is identified, the affected person should leave the room and abstain from the vote. The policy should say this clearly.
- Documentation: Conflicts disclosed and decisions made in the affected member’s absence should be recorded in board meeting minutes.
- Annual acknowledgment: Board members and key staff should sign a disclosure form each year confirming they have read the policy and identified any applicable conflicts.
The IRS provides a sample conflict-of-interest policy in the instructions for Form 1023, which can serve as a useful starting point. That said, a sample policy may not reflect how your organization actually operates or the specific risks it faces.
How Conflicts of Interest Come Up in Practice
The most common conflicts in nonprofit governance are not dramatic. They often involve situations that seem ordinary at first: a board member whose company is hired to provide services, a director whose spouse works for a vendor, or an officer who sits on the board of an organization that competes for the same grant funding.
Gray areas are where most organizations run into trouble. A board member may genuinely believe their involvement in a decision is appropriate, while an auditor or regulator sees it differently. The policy does not need to prohibit every dual relationship, but it does need to create a process for evaluating them consistently. Without documentation showing that a conflict was identified and handled correctly, even a reasonable decision can look problematic in hindsight.
How to Keep Your Policy Current and Effective
A conflict of interest policy is not a document you file and forget. It should be reviewed annually, ideally as part of your broader compliance review process. When board leadership changes, new members should receive a copy of the policy and sign an acknowledgment before they begin participating in votes.
The policy may also need updating when your organization takes on new funding sources, enters a new line of work, or expands its team. What was adequate for a small startup nonprofit may not be sufficient once you have paid staff, multiple programs, and significant assets under management.
Some organizations tie annual conflict-of-interest disclosures to their board meeting calendar, collecting signed forms at the first meeting of each fiscal year. Others include the review as part of board orientation. Either approach works, as long as it is consistent and documented.
Make Sure Your Policy Actually Protects Your Organization
Having a conflict-of-interest policy on paper is a start, but it only protects your nonprofit when it is actively used, consistently enforced, and properly documented. A policy that sits in a binder and never gets signed or discussed offers little real protection.
At Hubbs Law, we help Texas nonprofits draft, review, and update governance documents that reflect how their organizations actually operate. If you want to confirm your conflict of interest policy meets IRS expectations and fits your board’s structure, contact us to discuss your options. We can review what you have in place or help you build something from the ground up.