Can Nonprofit Board Members Limit Their Liability Risk?

Written exclusively for ChubbWorks for Not-for-Profit Zone

Most nonprofits are set up like a corporation. Incorporating a nonprofit provides its directors and board members the shelter of limited liability. This simply means that the nonprofit's creditors or anyone suing the nonprofit can only seek the organization's assets and/or insurance.

 

The small area of risk that a board member does hold resides with the board member's actions. Limited liability protection is valid only as long as the members fulfill their fiduciary duty to "exercise reasonable care when he or she makes a decision for the organization." A board member could also be found liable if they commit fraud or engage in any other type of illegal activity; purposefully harm another individual; or fail to remit appropriate payroll and property taxes.

 

Experts advise individuals to research any nonprofit before deciding to serve on its board and to avoid joining a nonprofit that is not incorporated or has no desire to incorporate. Joanne Fritz "Can Board Members Be Sued When a Nonprofit Fails or Is Sued?" www.thebalancesmb.com (Apr. 27, 2019).

 

Commentary and Checklist

 

Incorporation as a nonprofit is a best practice; another is developing bylaws that specify the responsibilities of the board members, outline conduct expectations, and include a conflict of interest policy.

 

Work with an attorney to incorporate and/or make sure that your incorporation is valid under state law.

 

Nonprofit directors and board members can limit their risk of liability by understanding their responsibilities and by faithfully fulfilling the duties of their position. Board members must perform duties with care, diligence, and good business judgment. They must act solely in the best interest of the organization, and in a lawful manner.

 

It is important for board members to avoid conflicts of interest and the appearance of a conflict of interest.

 

Here are some general fiduciary obligations of those who serve on nonprofit boards:

  • Attend, be prepared, review all documents, be involved in committee meetings, and stay informed about the operations of the organization.
  • Always place the organization's interest and purpose above your personal concerns or those of your family or friends.
  • Make sure the actions of the organization are in line with its mission and written policies, and that it is compliant with related laws and regulations.
  • Maintain the organization's financial stability by making certain established accounting procedures are followed and appropriately audited.
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