First-Time Founders: Board Members and Personal Liability
Nonprofit organizations play a vital role in society, providing essential services and support to those in need. However, running a nonprofit has its challenges and one of the most critical aspects of ensuring its success is having a strong board of directors. Board members oversee the organization’s operations, make strategic decisions, and ensure compliance with legal and ethical standards, including their fiduciary responsibilities. This responsibility will come naturally to your most enthusiastic board members. All directors should proactively promote their work, attempting to ignite that same passion in others. When talking to the media about your organization, they should paint it in the best light possible. But with this responsibility comes the potential for personal liability. In this article, we will explore the definition of nonprofit board members, the importance of understanding personal liability, and provide an overview of what nonprofit board members need to know to protect themselves and their organization.
Nonprofit board members have several legal responsibilities that they must adhere to to fulfill their duties and obligations. These responsibilities include fiduciary duty, duty of care, and duty of loyalty.
Fiduciary duty is the highest standard of care that board members must uphold. It requires them to act in the organization’s and its stakeholders’ best interests, including donors, employees, and beneficiaries. Board members must exercise due diligence in making decisions and managing the organization’s finances, assets, and resources.
Duty of care requires board members to exercise reasonable care and skill in carrying out their responsibilities. This includes attending meetings, staying informed about the organization’s activities and performance, and making informed decisions based on available information.
Duty of loyalty requires board members to act in the organization’s best interests and avoid conflicts of interest. Board members must disclose any potential conflicts of interest and abstain from voting on matters in which they have a personal or financial interest.
In addition to these legal obligations, nonprofit board members may also have specific legal duties that they must fulfill, including understanding and adhering to federal, state, and local laws. These duties include the duty of care, which requires board members to actively participate in decision-making on behalf of the organization and exercise their best judgment. Board members need to prioritize the organization’s interests before their personal and professional interests when fulfilling these legal duties to ensure the proper governance of the nonprofit organization. They should also seek guidance from legal and financial professionals to fulfill their responsibilities effectively. Additionally, board members must attend all board and committee meetings and functions to fulfill their care, loyalty, and obedience duties.
Can Nonprofit Board Members be Held Personally Liable?
Here’s the short answer: Yes, they can. But before you panic, let’s dive deeper into what that means and how to protect yourself, your board, and your board service. As a nonprofit founder, it’s important to understand the potential risks and responsibilities of serving on a board, including board service. So, let’s explore this topic further and make sure you have the knowledge you need to succeed.
Personal Liability of Nonprofit Board Members
Nonprofit organizations are established to serve a particular community or cause and are exempt from taxation. However, this tax exemption does not provide immunity to board members from personal liability. Board members are legally obligated to act in the organization’s and its beneficiaries’ best interests. Failing to do so can result in personal legal responsibility. Additionally, the IRS mandates that Form 990 must include a list of current board members, their titles, addresses, hours worked per week, and any compensation paid (including expense accounts). This public listing provides transparency about the nonprofit’s governance and financial management practices. It also serves as an essential tool for potential donors to assess the organization’s credibility before contributing funds.
Circumstances Under Which Board Members Can be Held Personally Liable
Board members can be held personally liable for a variety of reasons, including:
- Breach of Fiduciary Duty: Board members have a fiduciary duty to act in the organization’s best interest. If a board member fails to act in the organization’s best interest, they can be held personally liable.
- Negligence: Board members have a duty to exercise reasonable care in carrying out their responsibilities. If a board member’s negligence results in harm to the organization or its beneficiaries, they can be held personally liable.
- Misuse of Funds: Board members are responsible for ensuring that the organization’s funds are used for their intended purpose. If a board member misuses funds, they can be held personally liable.
- Employment Practices: Board members can be personally liable for discriminatory employment practices or for failing to comply with labor laws.
Types of Personal Liability
There are two types of personal liability that board members can face:
- Direct liability is a legal term that refers to situations where a board member is held personally accountable for their actions or inactions. In other words, it implies that the board member can be sued individually for damages caused by their decisions or lack of action. This type of liability is often associated with cases involving fraud, breach of duty, or negligence. Board members should be aware of the potential consequences of direct liability and take steps to minimize their exposure to such risks. It is important for them to act in good faith, exercise due care, and fulfill their fiduciary duties towards the organization they serve.
- Vicarious liability is a legal concept that can hold a board member personally accountable for the actions or inactions of another board member or employee. This means that even if the board member did not directly cause harm, they may still be held responsible for any damages incurred by someone else’s actions under their authority. It is important for board members to understand their responsibilities and take appropriate measures to mitigate risks and prevent any potential legal liabilities. Having clear policies and procedures in place can help prevent issues related to vicarious liability from arising in the first place.
Consequences of Personal Liability
The consequences of personal liability can be severe. Board members can be personally responsible for damages, fines, and legal fees. Personal liability can also damage a board member’s reputation and make it difficult to secure future board positions. Board members need to understand their legal responsibilities and take steps to mitigate their risk of personal liability.
Nonprofit organizations are governed by a board of directors, a group of individuals elected by the organization’s stakeholders. They are responsible for making important decisions and ensuring the organization complies with applicable laws and regulations. However, the responsibilities of the organization’s board go beyond just decision-making and compliance. As described in the usage example, the board of directors is an elected group of individuals responsible for the organization’s strategic management. The board should meet at least four times a year to set policies for management. It is a legal requirement for public companies to have a board of directors, but many non-profit organizations also have boards of directors. The board also plays a crucial role in ensuring effective governance practices, including engaging individual board members and fulfilling its obligations as a steward of the nonprofit’s assets, reputation, financial and human resources, and mission. A compliant set of bylaws will contain specific rules that spell out the responsibilities of the organization’s board members and things like the length of terms (1 year, 2 years, etc). Board members must adhere to best practices for nonprofit governance and obtain insurance coverage to protect themselves from personal liability. A company’s articles of incorporation and corporate bylaws determine the structure and powers of a board. Bylaws can set the number of board members, how the board is elected (e.g., by a shareholder vote at an annual meeting), and how often the board meets. The board typically meets at regular intervals.
Best practices for nonprofit governance include establishing clear policies and procedures, maintaining accurate financial records, conducting regular board meetings, and ensuring transparency and accountability. Board members must also ensure that the organization complies with all applicable laws and regulations, including tax, employment, and fundraising regulations.
In addition to following best practices, board members of public companies should obtain insurance coverage to protect themselves from personal liability, including claims related to conflict of interest. Nonprofit organizations can purchase directors and officers (D&O) liability insurance, which covers board members for claims related to their actions or decisions made on behalf of the organization. This insurance can also cover legal fees and other expenses associated with defending against a claim. Furthermore, having board membership can provide independent directors with a better understanding of the organization’s operations and help them fulfill their fiduciary obligations effectively. An inside director, who is an employee, officer, chief executive, major shareholder, or someone similarly connected to the organization, can bring valuable insights and knowledge of the entity’s inner workings and financial position. This can further enhance the board’s ability to represent the interests of shareholders, stakeholders, and managers.
Finally, board members should seek legal counsel and advice to ensure they fulfill their duties and responsibilities. An experienced nonprofit attorney can provide guidance on legal compliance, risk management, and other issues related to nonprofit governance, contributing to good governance. By following best practices, obtaining insurance coverage, and seeking legal advice, nonprofit board members can protect themselves from personal liability and ensure their organization’s greatest impact and success. Some nonprofits find that asking potential board candidates to first serve on a committee or task force, or volunteer for the nonprofit in another way, is a good way for both nonprofit and potential board members to find a good fit. Additionally, nonprofit organizations can benefit from establishing an advisory board to provide specific guidance related to the company’s business mandate and to bring insight to the top executive. A governing board with the authority to control and lead an organization can play a crucial role in overseeing the nonprofit’s operations and decision-making process.
Risks of Starting a Nonprofit without Understanding Personal Liability
Starting a nonprofit organization can be a fulfilling and rewarding experience, but it also comes with risks and responsibilities. One of the most important aspects of starting a nonprofit is understanding personal liability. Personal liability refers to individuals’ legal responsibility for their actions, and it can have serious consequences for nonprofit founders and board members.
One of the biggest risks of starting a nonprofit without understanding personal liability is the potential for financial ruin. If a nonprofit organization is sued and the founders or board members are found personally liable, they may be required to pay damages out of their pockets. This can be especially devastating for individuals who have invested significant time, money, and effort into the organization.
Another risk of personal liability is damage to reputation. If a nonprofit organization is sued and the founders or board members are found to be personally liable, it can damage their reputation and credibility in the community. This can make it difficult to attract donors, volunteers, and other supporters in the future.
Examples of Nonprofit Board Members Facing Personal Liability
In numerous cases, nonprofit board members have faced personal liability for their actions. For example, in 2018, the board members of a nonprofit organization in Pennsylvania were found to be personally liable for $2.5 million in damages after a volunteer was injured during a fundraising event. In another case, the board members of a nonprofit organization in California were found to be personally liable for $1.2 million in damages after a volunteer was injured while performing work for the organization.
Consequences of not Understanding Personal Liability
Personal liability is a crucial concept that nonprofit founders and board members must understand to avoid severe consequences. Failure to comprehend personal liability can lead to financial ruin, damage to one’s reputation, and legal penalties such as fines or even imprisonment in certain cases. Therefore, nonprofit leaders must clearly understand their legal responsibilities and obligations to ensure the organization operates within the law. Nonprofit leaders must take proactive measures such as obtaining appropriate insurance coverage and seeking expert legal counsel to safeguard themselves and their organizations from potential risks. By doing so, they can protect themselves against personal liability issues and focus on achieving their mission-driven goals.
Importance of Education and Preparation for Nonprofit Founders
Given the risks associated with personal liability, nonprofit founders and board members need to educate themselves and prepare accordingly. This may involve consulting with legal and financial experts, developing policies and procedures to minimize risk, and obtaining appropriate insurance coverage. By taking these steps, nonprofit founders and board members can help protect themselves and their organizations from the potential consequences of personal liability.
In conclusion, understanding personal liability for board members is crucial for nonprofit founders. Board members have a fiduciary duty to act in the organization’s and its stakeholders’ best interest. Failure to fulfill this duty can result in personal liability for board members. Therefore, nonprofit founders must prioritize educating themselves and their board members on personal liability.
Summary of Key Points:
- Board members have a fiduciary duty to act in the organization’s and its stakeholders’ best interest.
- Board members can be held personally liable for their actions or inactions.
- Nonprofit founders should prioritize educating themselves and their board members on personal liability.
Call to Action
Nonprofit founders must prioritize understanding personal liability for board members. They must ensure that their board members know their duties and responsibilities. Nonprofit founders should also provide training and resources to their board members to help them fulfill their fiduciary duties.
Final Thoughts and Resources:
Understanding personal liability for board members is an ongoing process. Nonprofit founders should continually educate themselves and their board members on this topic. Several online resources, such as the National Council of Nonprofits and the Nonprofit Risk Management Center, can help nonprofit founders and board members understand personal liability. By prioritizing this education, nonprofit founders can ensure their organization’s success and protect their board members from personal liability.
Disclaimer: This article is intended for informational purposes only and is not a substitute for legal advice. It is important to consult with a qualified attorney to discuss your specific situation and ensure compliance with all applicable laws and regulations. The author and publisher of this article are not responsible for any actions or decisions taken based on the information provided herein.