A charitable organization should not provide loans (or the equivalent, such as loan guarantees, purchasing or transferring ownership of a residence or office, or relieving a debt or lease obligation) to directors, officers, or trustees.
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.
When a charitable organization deems it necessary to provide loans, including salary advances, to an employee — for example, to enable a new employee to purchase a residence near the organization’s offices — the terms of such loans should be clearly understood and approved by the board. Board members should consult with legal counsel about any special requirements under state or federal law that could affect such loans, including any requirements that loans and advancements be treated as compensation. Such loans and advances must be reported on the organization’s Form 990.