A common call I get sounds like this:

“Help! We need to buy a ______, and the family member of an employee has one for a good price. Can we do that?”

Today, I want to help you answer that question! 

      For the purpose of this discussion, a “related party” refers to someone that you know or the family member of someone you know. So, can your nonprofit buy something from a related party? The short answer is “maybe.” According to the IRS, transactions with family members have to be done at what's called an “arm’s length.” So let's unpack that concept.

      For a transaction to be considered at an arm's length, it means that a transaction between two parties that are related in some way, has to be done as though they were unrelated and acting independently. So really, there shouldn't necessarily be a benefit to doing business with someone you know. It should actually be done as though you weren't doing business with someone that you know.

Guidelines for Arm’s Length Transactions

1. Consider Fair Market Value 

     The transaction has to be based on what the market says is the fair value of that item. In other words, what’s the value two strangers would've agreed on? In the case of a car, which is often what I’m asked about in these situations, I recommend that my clients look up the Kelley Blue Book value that will unpack a helpful framework for determining the proper value for the transaction. 

2. Independence & Objectivity

Next, you’ll need to think about independence and objectivity. Both parties have to act independently and in their own best interest, not in the best interest of the related party. There cannot be any special treatment or favorable terms just because of the relationship. For example, I often see favorable terms in the form of a payment plan. If a payment plan wouldn't have otherwise been considered with a stranger, then don't do it just because they're related.

3. Document What Happens

     Finally, you’ll want to document what happens. Record the process in a way that keeps the transaction transparent. Document not only the details of the transaction, but also  be sure to address what was done to keep the transaction at an arm's length. 

     Conducting transactions with related parties at an arm’s length is a crucial step in maintaining the integrity and credibility of your nonprofit’s finances. If I can help you further with this or any other topic related to nonprofit finance, feel free to book a strategic consult with me here. If you’d like more nonprofit financial tips like this delivered straight to your inbox, you can subscribe to my blog here. I look forward to serving you!