Serving on a nonprofit board is a great way to give back to the community, but many board members wonder: "Can I be held personally liable for the organization’s actions?" While nonprofit board members generally enjoy legal protections, there are certain situations where personal liability may apply. Here’s what you need to know.
Understanding Limited Liability for Nonprofit Board Members
Most nonprofit board members are protected from personal liability under laws like the Volunteer Protection Act and state-specific statutes. These laws generally shield unpaid directors from personal responsibility for decisions made in good faith while fulfilling their duties.
However, these protections are not absolute. Board members can be held personally liable in certain situations, including:
When Can a Board Member Be Held Personally Liable?
Breach of Fiduciary Duty – Board members have three primary fiduciary duties:
Duty of Care: Ensuring the nonprofit is well-managed and making informed decisions.
Duty of Loyalty: Acting in the best interests of the nonprofit, not for personal gain.
Duty of Obedience: Ensuring the organization follows its mission and complies with laws. Failure to meet these duties—such as neglecting financial oversight—can result in liability.
Improper Use of Funds – If a board member knowingly allows misuse of nonprofit funds (e.g., fraud, embezzlement, or unauthorized expenditures), they could be held personally responsible.
Failure to Pay Payroll Taxes – The IRS can hold board members personally liable if the nonprofit fails to withhold and remit payroll taxes.
Engaging in Illegal Activities – If board members approve actions that violate the law, such as engaging in fraudulent fundraising practices or ignoring regulatory compliance, they may face personal legal consequences.
Signing Personal Guarantees – If a board member personally guarantees a loan or lease for the nonprofit and the organization cannot fulfill its obligations, they may be held liable.
How Board Members Can Protect Themselves
While the risk of personal liability is low when acting responsibly, board members should take proactive steps to protect themselves:
Ensure Proper Governance: Attend meetings, review financial statements, and uphold fiduciary responsibilities.
Maintain Insurance Coverage: Encourage the nonprofit to carry Directors & Officers (D&O) Liability Insurance to cover legal costs in case of a lawsuit.
Avoid Conflicts of Interest: Disclose any personal interests and abstain from votes where conflicts exist.
Document Decisions: Keep thorough meeting minutes to demonstrate due diligence in decision-making.
Understand the Organization’s Finances: Review financial reports regularly and ask questions to ensure transparency and accountability.
Conclusion
Serving on a nonprofit board is a meaningful and rewarding experience, but it comes with responsibilities. By understanding potential liabilities and taking preventive measures, board members can effectively serve their organizations while minimizing personal risk. If in doubt, consulting an attorney specializing in nonprofit law can provide additional guidance and peace of mind.