Nonprofit board member liability: are you personally at risk?

Are board members personally at risk?

Not for the organization's normal debts. A nonprofit is its own legal entity. It signs its own contracts and owes its own debts, and those debts are not yours.

The law adds more protection. The federal Volunteer Protection Act shields unpaid board members who act within their role, unless the harm came from willful misconduct, gross negligence or recklessness. It also does not cover some other cases, such as harm you cause while driving a car. Your state may also protect volunteer board members, so check its volunteer protection law. So the base case is simple: you are not on the hook for the group's normal bills.

When personal liability can happen

Risk goes up in a few clear cases. Watch for these:

• Fraud or theft, or letting it slide.
• Unpaid payroll taxes, if you handled the money or knew they went unpaid.
• Using restricted funds for the wrong thing.
• Clear neglect, like never showing up or checking anything.
• A personal guarantee you signed by name.

Notice the pattern. Most trouble comes from bad faith or plain neglect, not from honest mistakes. Do your duties and your risk stays low.

How D&O insurance protects you

D&O stands for directors and officers insurance. It is a policy that covers board members and officers if they are sued over their choices.

It can pay for a legal defense and any settlement, up to the policy limit. Even a claim with no merit costs money to fight. D&O covers that cost, so a lawsuit does not land on your own savings. To pick that limit, see how much D&O insurance a nonprofit needs.

Insureon says its small nonprofit customers pay an average of $67 a month for D&O. If your board does not have it yet, that is worth a look. The nonprofit insurance guide walks through the main types.

How a conflict-of-interest policy protects you

A conflict-of-interest policy is a short set of rules. It tells board members what to do when a decision could help them in a personal way.

The rule is easy. You disclose the conflict, then you step out of the vote. The board notes this in the minutes. That record shows you followed the duty of loyalty.

This protects both the nonprofit and you. If a choice is ever questioned, the paper trail shows a fair process. The IRS even asks about this policy on Form 1023, the application for tax-exempt status. See the guide to bylaws and a conflict-of-interest policy.

A short checklist to lower your risk

• Buy D&O insurance and keep it current.
• Adopt a conflict-of-interest policy, and use it.
• Show up, read the packet, and ask questions.
• Keep clear minutes of every real decision.
• Pay payroll taxes on time, every time.
• Never spend restricted money the wrong way.