inurement

Inurement is a legal concept in nonprofit and charitable law referring to the improper use of an organization’s income or assets for the benefit of private individuals with substantial influence over the organization, such as directors, officers, trustees, or their family members. It denotes situations in which earnings or assets are diverted to insiders rather than used to further the organization’s exempt purposes.

Private inurement specifically describes benefits accruing to insiders, as opposed to the general public or charitable beneficiaries. While some private benefit can be permissible if it is incidental and reasonable in furthering the organization’s mission, inurement implies a level of benefit that conflicts with the organization’s tax-exempt status or mission. The concept is most often discussed in the context of U.S. tax law.

Consequences of inurement can be significant. Tax-exempt organizations risk loss of their tax-exempt status if inurement is found to be improper. In addition, there are related penalties in the form of intermediate sanctions for excess benefit transactions, where a disqualified person receives an unwarranted advantage. Reasonable compensation and arms-length arrangements are therefore essential to avoid inurement.

Prevention and governance measures include clear conflict-of-interest policies, independent compensation committees, regular disclosures, market-based salaries, and regular independent audits. By ensuring that payments and arrangements are fair, transparent, and closely tied to the organization’s mission, nonprofits reduce the risk of inurement and protect their charitable status.