On an inch by inch basis, questions about compensation and insider
transactions take up about one fourth of the whole Form 1023! There
can be no doubt that those who designed this Form 1023 believed that
excessive compensation and abusive insider transactions are a
serious problem in 501(c)(3) organizations. Part V of the Form 1023
appears to have been designed partly to identify possible problem
areas and partly to educate applicants about how to avoid problems.

Page 2 - Part V - Question 1a - Officers/Directors/Trustees
There is no law or regulation setting a minimum number of board
members for a 501(c)(3) organization, but the IRS must be convinced
that your board will have public interests at heart, rather than
private interests. The unspoken IRS rule of thumb seems be at least
three unrelated people on the board of a 501(c)(3) organization.

Page 3 - Part V - Questions 1b and 1c - Employees and Independent
Contractors Receiving More Than $50,000 per year.
If your organization can afford to pay employees and/or independent
contractors more than $50,000, it may be penny wise and pound
foolish to use a free public service website to prepare your
501(c)(3) application.

Page 3 - Part V - Question 2 - Family and Business Relationships
If you have related individuals on the board, such as a husband and
wife, the related persons should hold less than half the voting
power. For example, with two related people, you would need at least
three additional, unrelated, people on the board, making it possible
for the husband and wife team to be outvoted. The IRS is not shy
about asking groups to expand their boards if they feel it is
necessary.

Pages 3 and 4 - Part V - Questions 4 and 5 - Best Practices
The IRS has kindly made it clear what provisions they would like
501(c)(3) organizations to adopt.

Page 4 - Part V - Question 6 - Non-fixed Payments
"...the use of a method of compensation based upon a percentage of
the income of an exempt organization can constitute inurement of net
earnings...[which can]...destroy the organization's exemption under
section 501(c)(3) of the Code."

Any organization using or planning to use non-fixed methods of
payment should seek professional help for both the compensation
arrangements and preparation of the 501(c)(3) application.

Pages 4 and 5 - Part V - Questions 7 through 9 - Insider Goods,
Services, Leases, Contracts, and Loans
Additional questions designed to reveal certain types of possibly
abusive insider transactions.