Business Law Legal Topics

4 Things to Know Before Joining a Nonprofit’s Board

ThinkstockPhotos-78291349You’ve been asked to serve on the board of a nonprofit organization. Congratulations—you can render a real service to the community! Attorneys do make great nonprofit directors, but before you sign on, here are four things you should know.

1. Your organization’s basic legal structure. A good director should understand what kind of business entity the nonprofit is because there are rules surrounding what it can and can’t do to avoid jeopardizing its status. Most nonprofits are organized as California corporations—either public benefit, religious, or mutual benefit. Once it incorporates, the nonprofit is not automatically tax-exempt, but it can apply to the IRS to become so under IRC §501(c)(3).

2. Your organization’s governing documents. A nonprofit corporation is governed by its articles of incorporation and bylaws. The articles deal with the nonprofit’s purpose and assets; the bylaws include the corporation’s operating and governing instructions. A successful director needs to be familiar with both documents—they’ll specify what the nonprofit does, how decisions are made, and your responsibilities and duties as a director.

3. Your duties and responsibilities. Nonprofit directors govern and manage the corporation and make decisions about its activities and affairs. Even if the board delegates the corporation’s management, it should continue to supervise the corporation’s affairs. Directors of a charitable nonprofit corporation owe fiduciary duties to the corporation and to the public, including

  • the duty of loyalty, which requires directors to put the corporation’s interests ahead of their own, imposes limits on compensation, and requires them to avoid transactions in which they have a material financial interest (unless they’re approved by the board).
  • the duty of care, which requires directors to perform their duties like an “ordinarily prudent person” in similar circumstances.
  • the duty to comply with investment standards, which requires directors to follow certain investments standards, and must generally act in good faith and according to the “prudent person” standard. (Directors who follow these standards are generally protected from liability for investment decisions, even if they lose money.)

4. Your potential liability. Directors can be liable for negligence, fraud, and other torts; for falsifying documents; and for violating regulations on tax matters. Under California law, directors who follow the duties of care and loyalty generally aren’t personally liable for failing to perform their duties as a director. The federal Volunteer Protections Act of 1997 adds another layer of protection for directors. But there are so many exceptions and requirements in the statutes that nonprofits need liability insurance for their volunteer directors.

In CEB’s Advising California Nonprofit Corporations, you’ll learn much more about organizing, managing, and investing assets for a nonprofit corporation, to help you both with your nonprofit clients and when serving on a nonprofit board of directors. CEB’s Advising California Nonprofit Corporations is one of over 20 titles that make up CEB’s Business Law OnLAW library, a digital library that delivers substantive analysis of the law, step-by-step procedural assistance, and best-practice strategies for almost any area of California business law.

Other CEBblog™ posts you may find interesting:

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