Q&A #44 – Should a Board member personally own a nonprofit organization’s trademarks and website URL?
Question: I recently joined the Board of Directors of a nonprofit organization and learned that the organization’s founder (and current Board member) personally owns the organization’s website URL as well as the trademarks for the organization’s name. Is this allowed, or should the organization own these assets?
Answer: I have not seen guidance from the IRS directly addressing this situation, but I think it is problematic for a founder or Board member to personally own a nonprofit organization’s trademarks, website URL, social media accounts, and other types of intangible assets. While one could make an argument that there is no harm if the nonprofit is allowed to use these assets for free (or for a fee that is no more than fair market value), there are problems with this situation that become increasingly apparent over time.
The main legal issue is the restriction against private inurement, which applies to organizations that have federal tax-exempt status under section 501(c)(3), 501(c)(4), 501(c)(6), or 501(c)(7), as well as some other organizations. This rule provides that the assets of these organizations must not “inure” to the benefit of Board members, officers, and other insiders of the organization.
The problem is that, as time progresses, an organization’s activities, fundraising, and public goodwill tend to have the effect of increasing the value of intangible assets like its trademarks and website URL. Even if founder allowed the organization to use these assets for no charge, there is at least the potential for the founder who owns these assets to cash in on this value in the future (perhaps even after the organization dissolves). This is not consistent with the underlying principles of the private inurement rule.
Further, in the event the organization were to pay a fee to buy or license these assets from the founder, it would be very difficult to establish that the organization paid no more than fair market value. Unlike more common conflict of interest transactions (such as renting office space from a Board member or paying for services from a business owned by a Board member), there is no easy way to determine the fair market value of intangible assets like an organization’s name. This value is largely unique to the organization and inextricably tied to the work that the organization does.
Planning Tip – It is important to periodically review the account information, login credentials, and user profiles of an organization’s website URL, social media accounts, mailing list platforms, cloud storage accounts, and other similar resources. Even well-meaning Board members, employees, or volunteers can inadvertently register these accounts using their personal information, especially during initial startup and periods of staff and Board turnover. It is recommended to develop appropriate policies and procedures to make sure these important accounts always remain under the organization’s ownership and control.
Lastly, note that I am assuming that in your case the founder has owned these assets since before the organization’s existence. A Board member who registers a trademark or website URL of an organization that is already in existence would likely be breaching the fiduciary duty of loyalty. Specifically, this would probably violate the “corporate opportunity” doctrine, which prohibits Board members from diverting to themselves opportunities which in fairness ought to belong to the organization.
In any case, it is recommended to formally transfer these assets to the organization now instead of waiting. Over time the process to successfully resolve this issue will become more difficult and complicated.
If you have a question you would like to submit to SE4N, send it to us using the contact form and we will consider answering it in a future post. Please do not send confidential information.
