Nonprofit Board Liabilities: What Are the Legal Responsibilities of Your Board?

If you’ve ever worked or have been associated with volunteer leadership at a nonprofit board, then you are probably aware of a situation that can expose individuals to legal jeopardy.

One of the most essential aspects of serving on a board and having board members is to ensure that everyone has an understanding for their legal and fiduciary obligations. Unfortunately, many do not realize that ignorance of the law is not a defense.

So, if your nonprofit board decided for whatever reason to act in any way that is contrary to federal and state laws, the board and its members can be held legally liable.

IRS Liability for Nonprofit Boards

All charitable boards and their members have to understand that in addition to federal and state law, there is an added burden by serving on the board of directors of a nonprofit.

Nonprofits are designated as such under Section 501(c) of the Internal Revenue Service Code. And, as a 501(c) organization, they are entrusted to operate for tax-exempt purposes––exclusively.

While there are no hard and fast rules or guidelines established by the IRS around compensation, it’s important to note that if the IRS takes a look at your organization and finds that the pay for the nonprofit team is excessive, individual members of the board can be held liable. The new tax law even has a provision that hits charities with an excise tax of 20 percent on compensation above $1 million for a nonprofit’s top five highest paid employees.

A NonProfit Board’s Legal Obligations

If you’re a senior executive at a nonprofit, one of the best places you should be familiar with as it relates to board governance and leadership is BoardSource. The Bridgespan Group adapted in simple and easy to understand terms the legal responsibilities of a nonprofit board of directors from BoardSource.

Duty of Care

The first element of a board member’s obligation to a charitable organization and also to the community is the duty of care, which means the “care that an ordinarily prudent person would exercise in a like position and under similar circumstances.”

In other words, board members have a legal responsibility to serve the organization in a similar manner than any other reasonable person of legal age would behave and they have to do it in a way that is not reckless.

Duty of Loyalty

The second ingredient for nonprofit boards is to understand they have a duty of loyalty to the organization. In the simplest terms, it means each member, and wholly as a group, the board has a responsibility of loyalty to the nonprofit. The way that a board member demonstrates his or her commitment is by not personally gaining from the access or information they obtain.

For instance, if a nonprofit developed a cure for cancer and board members knew the formula, they cannot go and set up a for-profit company or sell the information to a pharmaceutical company for personal gain.

Duty of Obedience

Finally, all board members have a responsibility to remain faithful and obedient to the organization’s mission, vision and goals. Nonprofits are tax exempt, and boards are entrusted by society to ensure the financial integrity of a group.

If, for example, a charity had an excellent fundraising quarter, they cannot then decide to pay a bonus to the board members, because this would go against the trust society and the nonprofit has placed in its board members.

How Nonprofit Boards Should Protect Themselves

There are things your nonprofit board can do to ensure that every person understands their legal and fiduciary obligations to the organization, so you don’t have a scenario of unintended consequences.

• Annual board training: It is ideal to hire a consulting company or attorney who understands nonprofit board responsibilities and ensure there is an annual training required of all members of a board of directors. During the training, board members should be educated on their federal (including IRS), state and general liability issues.

• Insurance policies: Nonprofit boards should consider, at minimum, Directors’ and Officers’ Liability, which protects directors and officers of the company from wrongful termination, harassment and discrimination claims.

It is essential to have this type of insurance to cover board members from personal liability on these kinds of claims. Commercial General Liability insurance protects individuals, including board members, from bodily and personal injury claims. Personal liability insurance is always a good idea for an additional cover of personal protection, even though a nonprofit corporation has certain protections.

Again, speaking to an attorney experienced in nonprofit law and an insurance broker is highly recommended.

Personal liability does not have to prevent well-meaning people from serving on nonprofit boards. Knowledge is power, so ensuring that your organization is providing comprehensive information and protections will help assure that your nonprofit board will be able to do what it’s tasked to do without worry.