Are nonprofit board members liable?

An active board of directors is essential to the success of any nonprofit organization. Generally, the members of the board of directors are the governing body of your nonprofit and are legally accountable for its actions. The board has legal and ethical duties that cannot be delegated to others. The board is accountable to the public, to your supporters, and to your beneficiaries to oversee the accomplishment of the organization’s purposes. They board may hire top level staff, ensure an organization’s growth is aligned with its mission, and play a critical role in ensuring the organization’s financial health.

It follows then…if board members are the legal guardians of the organization, then do they have personal liability if things go wrong?

What is liability?

In law, a person is said to be legally liable when he or she is financially and legally responsible for something.

Is a board member personally liable for the debt of the organization?

Forming a nonprofit corporation normally protects the directors, officers, and members of the nonprofit from personal liability for the corporation’s debts and other obligations. Called limited liability, this shield may ensure that anyone who obtains a judgment against the nonprofit can reach only the assets of the corporation, not the bank accounts, houses, or other property owned by the individuals who manage, work for, or participate in the business.

According to the Texas Business Organizations Code §22.152, “members of a corporation are not personally liable for a debt, liability, or obligation of the corporation.” For example, if a nonprofit organization defaults on a loan, a director would not be personally liable to repay all or a portion of this debt.

When is a director protected?

The director and officers have protection against liability (Section 22.221 and 22.235 Texas Business Organizations Code) so long as:

1. the director acted in good faith;

2. the director acted with ordinary care (meaning care that an ordinarily prudent person in a similar position would exercise under similar circumstances); and

3. the director acted in a manner the director reasonably believes to be in the best interest of the corporation.

What are the duties of nonprofit directors?

Read more: What are a directors duties? What should a nonprofit director do? What are the protections for directors? What should nonprofit directors know about the nonprofit?

Do we need is directors’ and officers’ liability insurance (“D&O insurance”)?

While the corporate form offers certain protection for directors and officers, many nonprofits opt to obtain Directors’ and Officers’ Liability Insurance (commonly called D&O). D&O is an additional coverage to general liability insurance that specifically covers directors and officers of your nonprofit’s board. D&O coverage can offset the cost of defending your organization and your board of directors in case of a lawsuit.