Understanding the Legal Responsibilities of Nonprofit Board Members

Introduction

Joining a nonprofit board is not just an opportunity to contribute to a meaningful cause—it also comes with significant legal responsibilities. As stewards of the organization, board members are tasked with ensuring that the nonprofit operates ethically, legally, and in alignment with its mission. Here’s a breakdown of the key legal responsibilities every board member should understand.

Fiduciary Duty: The Foundation of Board Service

Board members hold a fiduciary duty to the nonprofit, which includes three core components:

1. Duty of Care: This requires board members to act with the same level of care that a reasonable, prudent person would exercise in a similar position. Board members must actively participate in decision-making, stay informed, and ensure they are fully aware of the organization’s activities and finances.

2. Duty of Loyalty: Board members must act in good faith and prioritize the interests of the organization over personal gain. This means avoiding conflicts of interest and always working toward the best interests of the nonprofit.

3. Duty of Obedience: Board members must ensure that the organization remains true to its mission and adheres to its bylaws, articles of incorporation, and other governing documents. This means acting in compliance with the nonprofit’s rules, policies, and mission at all times.

Understanding Governing Documents

Board members must be familiar with the organization’s key legal documents. These include:

1. Articles of Incorporation: This legal charter is filed with the state and must comply with state laws. It establishes the nonprofit's legal status and mission.

2. Bylaws: Bylaws outline the structure of the organization, including the size of the board, roles and responsibilities of officers, committee structures, and meeting requirements. Board members should ensure that the organization is operating in compliance with its bylaws and that these documents are up to date.

3. State Registration: If your nonprofit operates in multiple states, it may need to file for foreign registration in each state. Ensuring compliance with state-level registration and maintaining a certificate of good standing are essential for maintaining the nonprofit’s legal status.

Risk Management: Protecting the Organization

Risk management is another key area of responsibility for board members. This includes ensuring that the organization has adequate protections in place, such as:

1. Directors and Officers Insurance (D&O): D&O insurance protects board members from personal liability arising from their role. Board members should regularly review the organization’s D&O coverage to ensure it is current and sufficient, especially in new areas like cybersecurity.

2. Risk Management Committee: Consider establishing a board committee focused on risk management and compliance to oversee policies like cybersecurity and regulatory adherence.

3. Insurance Expertise: It’s valuable to have board members with experience in insurance or risk management to help navigate these areas effectively.

Policies to Support Ethical Governance

Board members must ensure the organization has policies that promote ethical governance and compliance. Some essential policies include:

1. Whistleblower Policy: Protects employees and board members who report unethical or illegal behavior.

2. Conflict of Interest Policy: Ensures board members disclose any personal interests that may conflict with their duty to the organization.

3. Cybersecurity/Privacy Policy: Especially in today’s digital age, protecting donor and beneficiary data is essential for maintaining trust.

4. Investment and Pension Policies: For organizations with an endowment or employee retirement plan, clear investment and oversight policies are crucial.

Overseeing Compliance with Tax-Exempt Status

Maintaining the nonprofit’s tax-exempt status is a critical responsibility. Board members must ensure that the organization complies with state and federal tax regulations. Key considerations include:

1. IRS Form 990: Nonprofits must file IRS Form 990 annually, providing transparency around mission activities, executive compensation, revenue sources, and expenses. The board should review and approve this document before submission.

2. Compensation and Bonuses: Significant rules exist around executive compensation. If your organization offers bonuses or incentives, the board must ensure compensation is reasonable and performance-based, keeping detailed records to ensure compliance with IRS rules.

Ensuring Proper Documentation and Transparency

Transparency is key to maintaining public trust. Board members must ensure the organization’s financial and governance documents are accurate and publicly available as required. This includes maintaining an accurate balance sheet, functional expense reporting, and ensuring that the organization’s revenue sources are clearly defined.

Board minutes, compliance reports, and other key documents must be maintained, and third-party auditors or regulatory agencies should have access to these records when necessary.

Final Thoughts

Board members play a critical role in ensuring that nonprofits not only meet their mission but do so in a way that is legally sound and ethically responsible. Understanding your fiduciary duties, maintaining compliance with governing documents, overseeing risk management, and ensuring tax-exempt status compliance are just a few of the key legal responsibilities of nonprofit board members.

By staying informed and engaged, board members can protect their organizations from legal risks while ensuring they operate with integrity and transparency.