In recent posts, we’ve been looking at the topic of executive compensation and severance agreement negotiation, and the importance of businesses working with experienced legal counsel to negotiate these agreements so as to minimize legal liabilities. For nonprofits, it is important to
Texas nonprofit law prohibits the payment of dividends and corporate income to members, directors and officers. As we noted last time, though, nonprofit corporations are able to pay reasonable compensation for services provided, and may confer benefits on members as long as the benefits conform to the purposes of the corporation.
Distributions may be paid to members in a couple circumstances. One of these is when a nonprofit corporation is dissolved. Another is when the member is a tax-exempt nonprofit corporation, the distributions are in accordance with the purposes of the corporation and the corporation meets two financial requirements. The first of these is that the corporation would be able to pay the corporation’s debts as they become due in the usual courts of its activities; the second is that the corporation’s total assets are at least equal to its total liabilities.
Both compensation/employment agreements and severance agreements are bound by these requirements. Nonprofits that fail to abide by the rules can end up being investigated by the Attorney General, which is certainly unfortunate as it can harm the public trust in the nonprofit and hinder its ability to fulfill its mission. Working with an experienced attorney can help ensure a nonprofit comes up with sound policies and procedures to remain in compliance with state requirements regarding compensation.