How to Protect Your Nonprofit’s Board Members

Your board of directors is one of the most important assets your nonprofit has.  Assuming they understand their role and are there for the right reasons, your board members provide invaluable insight, direction and oversight.  They volunteer their time and expertise, usually for little more than a pat on the back.  They also assume a certain level of liability in exchange for their efforts.  The old phrase, “No good deed goes unpunished”, is not something you want to see come true.  Let’s explore how to protect those who give of their time to your organization.

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Understanding the issues. The first step to properly protecting your board members is to educate them as to what they are responsible for.  It is discouraging to see the level of ignorance that many boards operate under.  We frequently encounter boards where some members are merely placeholders who are doing a favor for the founder.  They rarely participate in substantive discussions or planning, nor are they consulted with by the program director.  They have no idea that there is any liability to them, but there is.  This liability usually falls into three categories:  1) corporate (state), 2) federal (IRS) and, 3) general liability.  Let’s take a closer look at each:

  1. Corporate liability:  Board members are the legal, governing body of a nonprofit corporation.  They collectively represent the organization and its interests.  Each nonprofit corporation is incorporated in a particular state, according to that state’s corporate law.  Board members are responsible to make sure the corporation follows state law and that it follows its bylaws.  It is not terribly uncommon to hear of court cases involving other board members, or members of the public, accusing the organization of not abiding by its bylaws.  And, if the corporation is an employer, the board members have a fiduciary responsibility to ensure that employment taxes and related things are properly handled.
  2. Federal liability:  Fiduciary liability carries over into the federal arena.  In addition to fiduciary issues, the IRS also holds the board accountable for operating under the regulations and limitations of Section 501(c) of the Internal Revenue Code.  This means that your board is responsible for ensuring your organization’s programs are (and continue to be) operated for exclusively tax-exempt purposes.  While there are no fines associated with falling short of the mark, your board doesn’t want to be tagged as the ones responsible for causing the organization to lose its tax-exempt status.  Your board members are also directly responsible for setting appropriate compensation arrangements at arms-length.  As we discussed in last week’s installment, the IRS can and will hold individual board members personally liable if they find what they consider excessive compensation, particularly if not set at arms-length.  Under Intermediate Sanctions, these penalties can be substantial.
  3. General liability:  This involves issues like gross negligence.  Board members can be held liable for bad things they didn’t take steps to prevent or eliminate.  Examples include not screening childcare workers or not fixing that faulty handrail on the stairway of your facility.

Get protection. The best and most important protection is education.  Knowledge is empowering.  The more your board knows, the better.  The existence of liability sometimes scares-off otherwise qualified, potentially valuable board members, but it need not.  I serve on 3 nonprofit boards, fully understanding the liability that comes with that.  Why am I willing to do it?  Because I know what I am responsible for.  And as a result, I am able to fully exercise my responsibility in a way that best benefits the organization I serve while reducing my real liability exposure to nearly nothing.

What else can you do?  It is a good idea to look into liability insurance for your officers and directors.  It is relatively inexpensive and can go a long way toward providing protection to those who serve.  If your organization already has general liability coverage (which it should), your board members may already be covered…or may be added at little additional cost.  Just having that coverage is often enough to provide assurance to your board members that you appreciate their committment enough to cover their backs financially.

Don’t let the concern of liability keep great directors from serving your organization!  Liability is managable.  Like everything else, the more you know, the more you can do.

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.