Nonprofit Board Members and Personal Liability
Critical to the success of a nonprofit organization is the ability to understand its exposure to potential risks and how to mitigate them. Some of the risks to be considered are those faced by the organization’s board of directors. Often, however, board members may be unaware of the personal liability they face in exchange for their service and how they can better protect themselves.
Common situations that may increase a board member’s exposure to a personal liability claim can include issues surrounding:
- Conflicts of interest
- Lack of proper insurance coverage
- Improper acceptance of donations
- Lack of understanding regarding specific board responsibilities
- Decisions that aren’t in line with the nonprofit’s mission and core values
- Organizations that aren’t operating within state and federal laws
- Inability of board members to separate their personal values, goals and objectives from those of the organization
The board, directors, and trustees all owe fiduciary duties to the nonprofit organization they serve. This includes maintaining a duty of care, loyalty and obedience to the boards on which they sit, enforced by fellow directors, the organization’s officers, members and, in some instances, individuals or stakeholders. Directors who are out of compliance may be held personally liable for breach of fiduciary duties.
Fraudulent Acts or Omissions
Nonprofits are typically considered legal entities, meaning they are separate and distinct from the individuals who run them. As such, board members aren’t generally held personally liable for the debts, acts or omissions of the organization. However, there can be situations involving fraudulent acts or the lack of compliance on behalf of the organization that could, on rare occasions, implicate board members.
Under certain tax provisions, organizations that qualify as 501(c)(3) or 501(c)(4) are subject to immediate sanction rules under section 4958 of the Internal Revenue Code. If the IRS finds that a compensation paid to a nonprofit executive (also referred to as a disqualified person) is unreasonable or excessive, the executive, and in some cases individual board members, may be personally liable for IRS tax penalties. Directors can also be held personally liable if they fail to pay federal payroll taxes owed by the nonprofit organization.
Serving on a nonprofit board of directors carries some risk of personal liability. However, organizations that ensure board members understand their legal responsibilities, maintain proper due diligence, and have established a comprehensive insurance program that includes directors’ and officers’ liability insurance, can better protect a nonprofit board member against personal liability.
Additional sources used in the development of this article: Charity Lawyer, Internal Revenue Service, Mintz, BO&C, “Best Practices: Avoiding Personal Liability as a Nonprofit Board Member.”