Liability of the Directors of a Nonprofit Corporation

By Elizabeth Rayne

When a nonprofit corporation loses a lawsuit or otherwise owes money, the general rule is that individual members of the board of directors are not personally responsible. However, there are several exceptions to this rule. It is essential that the directors understand their roles and responsibilities before accepting a position on the board. In addition, many nonprofits, particularly larger organizations with more exposure to possible liability, purchase directors and officers liability insurance to further protect the board.

Responsibility to the Nonprofit

Each director is responsible for acting in the best interest of the organization and working to carry out the nonprofit's goals. They have a fiduciary duty, which means that they can only use the finances of the organization to serve the nonprofit's purpose. Directors must act in good faith to avoid personal liability. They don't have to be perfect, but they must act in a way that any reasonable person would under similar circumstances. By contrast, if a director acts recklessly or negligently and harms the organization, he may be personally liable for the damages he causes.

Private Benefits and Compensation

The interests of the nonprofit must take precedence over personal interests of individual board members. Nonprofit directors must be careful about taking any action that would benefit them personally or any other board member personally. Directors may lose liability protection for actions that constitute a conflict of interest, such as approving a contract between the nonprofit and a board member's personal business. Additionally, while directors generally may be reasonably compensated for their time, some state laws provide that only uncompensated volunteer nonprofit directors have limited liability under the law. State laws may also place limits on what percentage of board members may be compensated -- and prohibit compensating the entire board.

Ready to form a nonprofit? Get Started Now

Individual Activity and Liability

Directors may also be liable if they take actions that personally and directly injure someone, even if their actions are taken in the course of acting as a director of the nonprofit organization. For example, if a director assaults an employee of the nonprofit, the assaulted employee would likely have the right to sue the attacker individually, even if the incident occurred during a board of directors' meeting.

Piercing the Corporate Veil

If a nonprofit organization does not properly follow the required legal formalities in its state, or does not otherwise treat the nonprofit like a separate corporate entity, the court may find the directors personally liable for the debts of the nonprofit. This process is known as "piercing the corporate veil." It can occur if the board does not keep appropriate records or minutes, hold required meetings, or follow the correct voting procedures for board resolutions or actions. Nonprofits, particularly new organizations, may want to seek the advice of an attorney to ensure that they are properly following the requirements of incorporation.

Ready to form a nonprofit? Get Started Now
The Right to Sue a Board Director

References

Related articles

Requirements to Maintain 501C3 Status

More than 100 501(c)(3) organizations lose their exempt status every year, according to the Nonprofit Risk Management Center. The Internal Revenue Code section 501(c)(3) is a provision in the federal tax code, which allows certain nonprofit organizations, including charities, churches, educational institutions and other organizations that meet the requirements to be exempt from certain taxes. The IRS regulates and regularly reviews exempt organizations to ensure that they are following the regulations and that the organization continues to do the work that led to its exempt status. Failing to follow the guidelines can lead to fines and, in some cases, the loss of 501(c)(3) status.

Characteristics of Good Bylaws for a Non-Profit

Nonprofits often implement bylaws to ensure their resources are used efficiently and their charitable purposes fulfilled. Bylaws are the written rules and procedures that a nonprofit adopts and uses when conducting its operations and should define the purpose of the nonprofit. Some states require a nonprofit to have bylaws, and of those states, some also require that nonprofits file their bylaws with a state agency. A nonprofit may prepare its bylaws on its own or use an online legal documentation service.

Can a Company Be Held Liable if They Know They Did Wrong?

Companies are frequent targets of lawsuits because they usually have cash available to pay large settlement awards. Further, a company can be held liable for its wrongdoing in certain situations. Typically, a company will only be liable for wrongdoing if its agents had knowledge of the bad acts. However, under the doctrine of strict liability, a company may be held liable even if its officers were unaware of the wrongdoing. In addition to corporate liability, there is also the possibility that a company's officers may be held personally liable.

Doing the right thing has never been easier.

Related articles

The Responsibilities of the Board of a C Corp

A "C" Corporation is the standard form of a corporate entity; it is a separate legally taxable organization, which ...

Fiduciary Responsibility of a Presidential Officer for a Nonprofit

The president of a nonprofit, like the president of a for-profit business, is legally required to act with special care ...

Legal Obligations for Hiring an Executive Director of a Nonprofit

Hiring an executive director is an important step for any expanding nonprofit. In addition to practical considerations ...

Does a Nonprofit Board Have to Approve Contracts or Can the Executive Director Do That?

A nonprofit's board of directors is legally responsible for financial oversight of the organization. By adopting bylaws ...

Browse by category
Ready to Begin? GET STARTED