California Law Regarding Nonprofit Board of Directors

By Lee Hall, J.D.

California Law Regarding Nonprofit Board of Directors

By Lee Hall, J.D.

Every California nonprofit corporation must have a board of directors. Most public benefit corporations have at least three directors, as the board must have a board chair or president, a secretary, and a treasurer.

Man crossing arms and smiling in office space

Selecting the Directors

The nonprofit's voting members (if any) or the existing board of directors vote the board in. The bylaws may also enable appointments of directors. Bylaws should set forth the selection methods allowed, the scope of directorships, and provisions on resignation, removal, and term limits.

At the nonprofit's initial meeting, the newly adopted bylaws should name the initial directors. By default under state law, these individuals serve a term of one year. The bylaws may specify terms of up to four years (six if the nonprofit has no members). Directors attend board meetings and may, at times, have to deal with urgent matters that crop up. They must vote in person, not by proxy.

Payments to Board Members

Most directors receive no pay for their service beyond reimbursement for meeting expenses (e.g., mileage, parking, and meal bill). Any payments for service of directors must be reasonable. California limits the number of directors a corporation may pay.

More than half of the public benefit corporation's board must consist of "disinterested" directors. "Disinterested" individuals and their family members have no paid roles with the nonprofit, apart from their role as directors.

While a nonprofit generally may not lend money to its directors or officers, it may advance a reasonable amount to money to cover a director's necessary costs rather than reimburse them later.

The entity's Return of Organization Exempt From Income Tax (Form 990) must show all compensation to directors and officers, any trustees and key employees, and the dates any proposed compensation received board approval. The board must include a description of the decision making process. Deliberation on salaries and other compensation should use comparison research. The board should include in its meeting minutes how it voted, identifying all attending board members including those with conflicts of interest.

Directors' Fiduciary Duties

Directors must stay apprised of the entity's program and operations, keep minutes of its meetings, and ensure the board has current copies of and reviews the articles of incorporation, bylaws, financials, and membership lists.

Directors act as fiduciaries. Each owes a duty of care to the nonprofit and to its charitable beneficiaries. Directors should vote carefully and not simply agree to the preferences of board members, management, or staff members.

Each director also owes a duty of loyalty to its nonprofit corporation. This means always acting in the best interest of the corporation. It means applying the level of care that another prudent person would in a similar situation, making reasonable inquiries when appropriate.

Self-Dealing

Directors may not seek personal benefits from the nonprofit and must avoid self-dealing. An example of a self-dealing might involve a contract or payment to another party that benefits a director or the director's business.

That said, what if the nonprofit could not secure a better arrangement with reasonable effort elsewhere? Then, a concurrent benefit to a board member should not prohibit the deal. California's Corporations Code, in section 5233, lays out the proper steps for advance validation of the self-dealing agreement. This requires a majority vote by the disinterested directors. If necessary, the nonprofit board may submit a notice to the state's attorney general describing the proposal and receive an evaluation within sixty days.

Liability Issues

Nonprofit directors and officers, acting in good faith, have statutory liability protections under sections 5047.5 and 5239 of California's Corporation Code.

Yet directors who breach their fiduciary duties may incur personal liability to the nonprofit. Even volunteer directors and officers can face liability should the attorney general sue the organization or should they face legal action for self-dealing or inappropriately distributing money.

Indemnification insurance can protect directors and officers yet does not shield them from every kind of claim. No insurance can shield a self-dealing director. Indemnification of nonprofit representatives must be consistent with the corporate documents and state law.

For information on other responsibilities and issues pertinent to boards of directors in California, refer to the Attorney General's Guide for Charities.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.