One of the biggest concerns for nonprofit leaders is whether they could be held personally liable for the organization’s financial obligations, including mortgages, leases, or contracts. The good news is that a properly structured nonprofit provides limited liability protection—but there are exceptions.
Limited Liability Protection for Nonprofits
When a nonprofit is legally incorporated and recognized as a 501(c)(3) or other tax-exempt entity, it is considered a separate legal entity. This means:
Board members and officers are not automatically responsible for the nonprofit’s debts.
The nonprofit itself is responsible for honoring contracts, paying loans, and covering obligations in its name.
However, there are exceptions where individuals could be personally liable.
When Can Board Members or Officers Be Personally Liable?
1. Personally Signing as a Guarantor
If a board member, officer, or executive personally guarantees a mortgage, loan, or contract (e.g., by signing a personal guarantee), they assume full responsibility for the debt if the nonprofit cannot pay.
Tip: Always review loan documents carefully and avoid signing personal guarantees unless absolutely necessary.
2. Fraud, Misuse of Funds, or Gross Negligence
Board members and officers must act in the best interest of the nonprofit. Personal liability may apply if they:
Commit fraud (e.g., falsifying financial reports).
Misuse restricted funds (e.g., spending a grant on unauthorized expenses).
Engage in gross negligence (e.g., ignoring major financial issues that lead to default).
Tip: Follow strong financial oversight practices and ensure proper board governance.
3. Violating Fiduciary Duties
Board members owe the nonprofit three key fiduciary duties:
Duty of Care – Making informed, responsible decisions.
Duty of Loyalty – Acting in the nonprofit’s best interest, not personal gain.
Duty of Obedience – Following bylaws, mission, and legal obligations.
If a board member violates these duties, they could face personal liability.
Tip: Keep clear meeting minutes and follow best practices for nonprofit governance.
4. Unpaid Payroll Taxes
If a nonprofit fails to pay payroll taxes (like employee withholding taxes), the IRS can hold certain individuals personally responsible. This is known as the "Trust Fund Recovery Penalty" and applies to anyone who:
Has control over financial decisions.
Willfully fails to pay payroll taxes.
Tip: Always ensure timely tax filings and work with a nonprofit accountant if needed.
How to Protect Yourself as a Board Member or Officer
Incorporate and Maintain Compliance – Ensure the nonprofit remains in good standing with the state and IRS.
Avoid Personal Guarantees – Do not sign personal guarantees unless absolutely necessary.
Use Directors & Officers (D&O) Insurance – This protects board members and officers from personal liability in many cases.
Follow Financial Best Practices – Regular audits, financial transparency, and adherence to fiduciary duties help avoid liability.
Final Thoughts
In most cases, nonprofit board members and officers are not personally liable for the organization’s mortgage, contracts, or debts. However, personal liability can arise in cases of personal guarantees, financial mismanagement, or legal violations. By following best practices for governance and financial oversight, you can serve confidently without unnecessary risk.
Need expert guidance? InstantNonprofit can help ensure your organization is properly structured and compliant.