Do You Have Nonprofit Board Liability? Are You Sure?

Do you know what kind of legal risk is involved in being a board member? When board members serve on a nonprofit board, they assume a level of personal liability. As a nonprofit director, it is worth your while to educate new board members on nonprofit board liability issues.

nonprofit board liability answers

Nonprofit Board Liability Protections

Obtaining liability insurance to cover your directors, officers, and board is always a good idea. It’s one more way to protect against personal liability. The insurance is inexpensive and goes a long way to providing protection to those who serve your organization. This type of coverage is typically sufficient to protect board members. However, it is still important for the board to know about liability issues.

Incorporating a nonprofit organization protects trustees from personal liability. If the organization is sued by a disgruntled employee or someone who was injured in the facility, the person suing must sue the corporation rather than the people behind it.

Of course, there is no iron-clad guarantee against total personal liability. There are certainly exceptions. In cases when a board member intentionally injures someone or personally guarantees a loan or debt, the individual board member can be held liable.

In general, there are three areas of liability that can affect a nonprofit board. They are: general liability, federal or IRS liability, and state or corporate liability.

General Liability

General liability encompasses issues of gross negligence. These are glaringly obvious cases in which the organization should have taken steps to prevent or eliminate risk. Examples might be not fixing safety hazards in your facilities or improper screening of employees who later created issues or even committed crimes. Other cases involve intentionally illegal or fraudulent actions on the part of the board member and co-mingling of personal and nonprofit funds.

State or Corporate Liability

The board can have corporate liability because board members function as the legal governing body of a nonprofit. Because nonprofit corporations are incorporated within a state, the board must follow state law as well as its own bylaws. Highly visible organizations which don’t follow these rules are often outed by the community, or even former board members. Yes, you are a nonprofit, but you are also likely an employer in the state. Therefore, the board has a fiduciary responsibility to properly handle employment finances, taxes, and similar issues.

Federal or IRS Liability

In addition to fiduciary responsibility at the state level, boards also have the same responsibility at the federal level with the IRS. Nonprofits are designated as 501(c) entities under federal law (the Internal Revenue Code). Therefore, your organization must operate within those tax-exempt guidelines. No board wants to be associated with the organization losing its tax-exempt status. The IRS can hold board members personally liable for cases of excessive compensation or other activities which appear way outside of the 501(c) statute.

The Basics of Nonprofit Board Liability

When it comes to liability, the more your board knows, the better. Educate your board. Don’t lose qualified and available board members because they are fearful of personal liability. Like most things, liability is manageable. In reality, very few boards have actually been sued. Get your board up to speed on the topic today!

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