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Legal Liability for Nonprofit Board Members (Part One)

In real world practice, becoming a board member for a nonprofit organization usually comes with little personal risk, and the probability of a member being legally accountable for actions taken by the nonprofit is relatively low. The fear of being accountable for such actions should rarely be a factor in the decision to invest time and interest in a nonprofit organization.

However rare it may be, there are instances when board members could be legally accountable. There are two levels of accountability that board members and officers are subject to: corporate law and IRS tax-exemption regulations. This article will focus primarily on corporate law. Keep in mind as you read this article: personal accountability of a board member can be easily minimized by operating under proper due diligence.

Incorporating on the state level is highly recommended for all nonprofit entities because it provides a veil of protection to the organization and its members. As an incorporated organization, the nonprofit becomes the first line of defense from a legal perspective. The legal entity exists wholly apart from the people involved with it.

As an incorporated entity, the nonprofit must have Bylaws in place. Bylaws are considered a legal document that dictates how an organization must be governed. Board members need to understand what is written in a nonprofit’s bylaws, and be willing to follow the provisions outlined within the document.  Bylaws should include an indemnity clause, which is in place to protect those involved with the organization from expenses and liabilities. The organization can legally provide indemnity against expenses of a lawsuit or litigation if it chooses. The indemnity clause is normally carried out through the purchase of officers/directors insurance. While officers/directors insurance is a prudent investment, it is not legally required.

Even if an organization has all the right pieces in place, there are some specific instances where individuals could be found liable. Here is one example: A local nonprofit has scheduled an event to take place within the community. A snow storm hits the day before the event, and the facility is covered in ice. The board officers decide the event should still take place, but no effort is made to clean the ice from the walkway to the building’s entrance. If someone were to fall on the ice and become injured, a board member or officer could be at fault for not taking the proper measures to either clean the walkway or cancel the event.

Here is another, more extreme example: A children’s program has ensured the public that the organization runs thorough background checks on all its employees. However, the organization hires a registered pedophile without a proper background check, which results in child abuse. The directors could be found liable for not taking the prudent steps which might have prevented this tragedy. While the directors may have legal support under the organization’s indemnity policy, they could still be legally responsible under gross negligence.

In instances like the ones detailed above, the court may allow a plaintiff to pierce the corporate veil that would otherwise protect individuals on the board.

While it is possible that individuals can be legally accountable for actions performed on behalf of a nonprofit, it is outside the norm. Adhering to the corporate Bylaws and following proper due diligence will go a long way toward protecting individuals from legal accountability. Keep in mind that the content of this article discusses legal accountability as it relates to corporate law.  In part two of this blog post, we will discuss the IRS tax-exemption regulations.

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.

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