What Liability Do Your Board Members Have?
Nonprofit corporations must have a Board of Directors that steers the organization and ensures that it remains in compliance with state and federal regulations. Board Members, or would-be Board Members, often ask whether they can be held responsible for the actions of the nonprofit. It’s important that each Board member realizes their duties and realizes there is the possibility for liability. There are several different layers of liability that a Board member should be aware of, which can be summarized as (1) corporate liability, (2) federal liability, and (3) general liability.
First, Board members are the governing body of a nonprofit corporation, putting upon them some measure of liability to the corporation. Board members are responsible for making sure the corporation follows state law and its own bylaws. Thus, Board members must actually read the by-laws, and any other corporate documents, including the Articles of Organization or other formational documents. This follows along with the three legal duties of a nonprofit board member: 1) duty of care, which means assisting the organization to the best of their abilities, attending meetings and participating actively 2) the duty of loyalty, to put the organization’s interests above their own personal interests as related to the organization, and 3) the duty of obedience – to the bylaws, and to state and federal law.
The second major liability circle is federal liability. Nonprofits are recognized by the IRS as being tax-exempt, under the regulations of Section 501(c) of the Internal Revenue Code. Obviously, a Board member is not going to know the entirety of federal law, but they should realize what it means to be tax-exempt. An organization that claims tax exemption has to be operated and organized exclusively for exempt purposes, which includes charitable, religious, and educational purposes, among other things. Before joining a Board, an individual should educate themselves as to the basic doctrines of tax exemption and what it means for the specific organization they are serving on. They should ask, “What type of organization is this? What are our exempt purposes?” Inquire as to whether the organization has worked with or works with a lawyer and tax accountant. Items that can cause a tax-exempt organization to lose its tax-exempt status include: failing to file corporate tax returns for a period of time, failing to set appropriate compensation, such that compensation results in an undue benefit to an individual, and generating excessive business from a trade or business that is not substantially unrelated to the organization’s exempt purposes.
Nonprofit Board Members are responsible for reviewing and approving tax returns and financial records. They are not expected to know every avenue of the law and regulations but should be able to recognize when a professional’s assistance is needed.
The final grouping of liability concerns stems from negligence of Board members. These are things that the Board members should see and should have prevented, such as dangerous conditions in the facility the organization uses or failing to screen childcare workers for child-related activities.
To reduce liability, education is key. If you are doing your job at attending meetings, reviewing the Board’s resources and corporate records, and listening actively, you are well on your way to protecting yourself. Don’t be afraid to speak up when something is concerning or unclear. However, there is also liability insurance available for officers and directors. This can be important especially for organizations that have a higher risk of lawsuits, such as those working with children or potentially dangerous activities.
Serving on a non-profit Board is a great way to help your community and make lasting changes. However, it is an obligation that should be approached with respect and careful attention.