Inurement: Overview, definition, and example
What is inurement?
Inurement refers to the benefit or advantage that accrues to a party, typically as a result of a legal arrangement or agreement. The term is often used in the context of non-profit organizations or legal agreements to describe the idea that no part of the organization’s income or assets should benefit an individual or shareholder personally, unless specifically allowed. Inurement can also apply to situations where rights or benefits derived from an agreement are transferred or applied to other parties involved.
In simpler terms, inurement means the benefits or advantages that one party, often an organization, can legally or morally gain from an agreement, arrangement, or set of conditions.
Why is inurement important?
Inurement is important because it ensures that an agreement or organization operates in a way that is fair and in accordance with legal and regulatory standards. For example, in nonprofit organizations, the concept of inurement is used to prevent the organization's profits from benefiting private individuals, like board members or founders, except for reasonable compensation for services rendered. In other contexts, inurement ensures that the intended beneficiaries of an agreement or provision actually receive the benefits, rather than those benefits being diverted.
For businesses and organizations, inurement helps protect the integrity of operations, ensuring that funds and resources are used for their intended purposes. It also ensures compliance with tax and legal regulations, especially for nonprofit organizations, where improper inurement can lead to penalties or loss of tax-exempt status.
Understanding inurement through an example
Imagine a nonprofit organization that raises funds for environmental conservation. The organization’s by-laws include an inurement clause that specifies that no part of the organization’s earnings should benefit its directors, officers, or any private individuals. However, if a director receives reasonable compensation for work or services rendered to the nonprofit, that would be allowable under the inurement clause. The goal is to prevent the organization’s funds from being diverted for personal gain but still allow for legitimate compensation.
In another example, a company enters into a contract with a supplier where the supplier is allowed certain benefits, such as access to exclusive market data. If the contract stipulates that the benefits of this agreement will inure to the supplier’s benefit for the duration of the contract, the supplier will gain access to the data as per the agreement, without the benefits being diverted to other parties.
Example of an inurement clause
Here’s how an inurement clause might appear in a contract or organizational document:
"No part of the income or assets of the Organization shall inure to the benefit of or be distributable to its members, trustees, directors, officers, or other private persons, except that reasonable compensation may be paid for services rendered to or for the Organization in furtherance of its exempt purposes. Any such payments must be consistent with applicable tax laws and regulations."
Conclusion
Inurement ensures that benefits are appropriately distributed according to the terms of an agreement or legal structure, especially in cases where there are strict guidelines on how funds or resources can be used. It helps maintain transparency and legal compliance, particularly in nonprofit organizations, while also ensuring that the intended beneficiaries are the ones receiving the advantages or benefits from the agreement.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.