Frequently Asked Questions

Boards and Governance

Can board members be personally liable?

Board members are generally NOT liable for the debts of the nonprofit organization when the nonprofit is a corporation. (One of the advantages of the corporate form is "limited liability" which results in the fact that the debts of the corporate stay with the corporate and do not travel to those who serve on its board. However, each board member has a legal responsibility to exercise "due care" in the performance of his/her duties. Exercising proper fiduciary duty includes overseeing/approving the financial and accounting practices of the nonprofit and ensuring that the nonprofit avoids penalties that can be incurred by inaccurate and untimely IRS filings. In very few cases, such as when individual board members approve the payments of excessive compensation, or when the nonprofit fails to withhold employment taxes (social security and income tax withholdings) for its staff, individual board members may be subject to penalties.

  • It is unusual for a state or a fellow board member to bring a legal action against a board member for failure to exercise “due care.” Moreover, board members will generally not be liable if they have relied, in good faith, on advice provided by competent professional advisors, such as accountants and lawyers. Therefore, hiring reliable professionals, asking pertinent questions, and familiarizing themselves with prudent governance practices, as well as the nonprofit's financial statements, internal controls, and accounting practices, are important ways that board members can protect themselves from liability for a failure to exercise "due care."

If the organization has not filed its 990 on time, can board members be liable?

It is ultimately the board’s responsibility to ensure that the organization complies with legal requirements, such as the requirement to file an annual return, Form 990, with the IRS. The IRS may impose penalties on the organization for late returns ($20 per day for each day the return is late. The maximum penalty is $10,000 or 5 percent of the organization's gross receipts, whichever is less. The penalty increases to $100 per day up to a maximum of $50,000 for organization whose gross receipts exceed $1,000,000). While the penalty is not imposed on board members, late filing or failure to obtain an extension from the IRS for filing the 990, may be evidence that the board is not meeting is legal “duty of due care.” Note that the IRS treats returns that are incomplete in the same manner as if they were late-filed.

  • The IRS web site offers guidance on procedures to follow to request an abatement of penalties for late-filed returns by nonprofits.
  • In a case of first impression in early 2008, the IRS was successful in bringing a criminal action against former officers of Care International, Inc. for, among other fraudulent actions, the organization’s failure to file accurate annual reports with the IRS (Form 990).

Should we find a lawyer, accountant or insurance professional to serve on our board?

Every nonprofit thinks they need an insurance professional, a CPA, and a lawyer on their board, but that is not always possible. Even if these professionals served on your board, it might create a conflict of interest for them to represent the nonprofit directly if you also expect them to provide objective professional advice to the nonprofit. Far better is to find volunteers in the community to serve on appropriate committees who are willing to roll up their sleeves but who are not the designated insurance broker, legal counsel or audit representative for the nonprofit. What if the nonprofit is not pleased with the insurance agent’s performance? It is very awkward to fire your board member! A better solution is to include your insurance broker on a risk management committee that identifies priorities for addressing risk.

What is the role of the audit committee? Do we need one?

The audit function, for those nonprofits that are required to have an independent audit, should be overseen by the board of directors, however, the full board is not needed to do so. Many organizations find that it is most efficient to have a small audit committee in place to recommend the hiring and conduct the review of the outside auditor’s performance and to serve as the liaison between the auditor and staff who run the nonprofit’s finances day-to-day. The intermediary function of the audit committee is critical for providing an independent review of the nonprofit’s financial procedures, to ensure that prudent policies are in place and being followed, and that the personnel involved are competent and providing accurate reports on a timely basis to the board and the outside auditor. For information about the distinctions between an audit committee and a finance committee click here. For a sample charter for an audit committee, click here.

May board members be reimbursed for their expenses?

There are no laws that would prevent a charity from providing compensation to board members for their board service, but the majority of public charities do NOT compensate their board members. More typical is for board members to be reimbursed for reasonable and necessary expenses incurred in connection with their service to the nonprofit as a volunteer board member, such as reimbursement for parking and related expenses to attend meetings (although the board member may instead deduct mileage on his/her personal income taxes as volunteer-related expenses.)

  • Any reimbursement should be in line with the nonprofit’s policies for staff on travel and meeting expenditures and should also be consistent with the nonprofit’s articulated policy on compensation for board members, if it has such a policy. See guidance provided by the Panel on the Nonprofit Sector,, Principle number 20.
  • The IRS has issued a white paper on Governance Related Topics for 501(c)(3) organizations that also discusses executive compensation and refers to compensation for officers as well as key employees.

What governance policies should our board be considering?

In addition to a review of mission, articles of incorporation and bylaws from time to time, the board should consider adopting, as a baseline, the following governance policies:

  • Conflict of Interest policy for board and staff
  • Compensation policy for chief staff officer and key senior staff, including independent contractors/consultants
  • Personnel policies for employees and volunteers
  • Code of Conduct or Code of Ethics
  • Board compensation/reimbursement policy
  • Travel expenditure policy for business travel by staff
  • Financial management policies, including financial controls and hiring/review of outside auditors, as applicable
  • Whistleblower protection policy
  • Document Destruction and Retention Policy
  • Gift Acceptance policy
    • Special attention to non-cash, unusual gifts such as art work, real estate and speculative securities or partnerships, and royalties
  • Fundraising policies
    • May include a corporate sponsorship policy
    • Review of contracts with independent paid fundraisers
    • Charitable Registration

Our board members can be indemnified and since they are volunteers they are covered by charitable immunity. Do we need Directors and Officers’ Liability Insurance?

Board members who serve without compensation may be covered by charitable immunity in some states for certain actions, however, charitable immunity will not prevent a lawsuit from being filed against them – or the nonprofit. In such cases, the nonprofit — or the board member — will be required to hire legal counsel to argue that the case should be dismissed, which is likely to cost several thousands of dollars. D&O insurance is the tool many organizations use to shift the financial burden to an insurance carrier to avoid having to foot the legal bill. Similarly, indemnification may be available to pay back a board member who has expended his/her own funds to defend a lawsuit. However, if D&O insurance is in place, often there is no need for the charity to expend its own funds to pay back the board member.

A board member would like us to hire his daughter for a summer job – Is this a good idea?

Board members are the supervisor of the CEO/executive director – that same executive director may have to tell the board member that his daughter’s job performance is unsatisfactory. Compensation paid to family members of board members must be disclosed on a nonprofit’s annual report to the IRS (Form 990) and should also be disclosed to the entire board. These realities cause many nonprofits to avoid hiring a family member of a board member. Each organization should consider how they would handle this situation and decide whether the risks of hiring a family member of a board member are risks the organization is willing to accept.

What’s the best way to find new board members?

Most board members are recommended by existing board members. It’s best when current board members take the role of identifying their successors seriously. One exercise that can help is to conduct a board self-assessment and determine a “wish list” for expertise and experience that your nonprofit will need in the short and long term. From that list, identify individuals in the community who can help fulfill the nonprofit’s future needs for ‘time, talent and treasure.’ It’s helpful to ask people who may be future board prospects to serve on committees so that they can become familiar with the nonprofit’s mission and programs. There are local and regional “board match” programs as well as a national internet matching service, BoardNet USA™, that offers assistance at no cost.

Our board members have served for a long time. What’s the risk?

There are legal risks in failing to re-elect board members when their term has expired.State laws restrict the terms of board service by requiring that nonprofits hold elections, generally annually, or as designated in the organization’s bylaws. State law usually permits board members to be re-elected after their term has expired, however, each nonprofit needs to follow its own bylaws with respect to election of board members. Failing to follow your own bylaws is not only poor governance but can lead to intervention by the state (as well as practical difficulties in determining whether any of the actions taken by the board while it was illegally constituted are indeed valid!) Board members are critical resources for your nonprofit: they provide a sounding board for ideas, access to financial resources, and their own professional experience and expertise. Their passion and commitment to the organization is essential – are your board members still passionate, or are they exhibiting burn out? Are there resources in the community that your organization needs to tap into but just can’t seem to do so? If the answer to either of these questions is ‘yes,’ bringing new board members on board could be the answer. The risk of keeping the same board members year after year is that the nonprofit is losing out on the opportunity to bring an infusion of new funding, new ideas and new energy to the organization.

Do board meetings have to be open to the public?

In some states there are laws known as “Sunshine laws” that require groups to open their meetings to the public, however, these laws generally only apply to governmental or quasi-governmental groups.Unless the nonprofit is a governmental entity, there is no obligation to open board meetings to the public. (“Governmental entities” would include school boards, state educational organizations, such as a state university, and quasi-governmental groups such as public libraries.)

How can I convince my board that they should be involved in fundraising?

If your board doesn’t take its responsibility to fund raise seriously, then your organization is at risk. A board has a legal duty of “due care” that involves ensuring that there are enough resources for the organization now, and in the future. If you can’t get your board to accept the old adage, “give, get or get off,” perhaps it is time to bring an outside voice into the boardroom– a paid consultant or a respected board member from another community organization – who can encourage the board to step up to the plate.

  • There are affordable publications available from BoardSource that you can circulate at board meetings
  • There is a free newsletter called Blue Avocado, that has lots of articles in its archives on this topic. Signing up your board members to receive it electronically is a subtle way to educate them on their role to assist staff in identifying and providing sufficient resources for the organization, now and in the future.

How can we involve the board in risk management?

Board members are often described as being in the crows nest, looking out on the horizon, while the staff leaders are at the ship’s wheel steering it through the sometimes choppy waters, in the right direction. The job in the crow’s nest is to call the crew’s attention to storms brewing on the horizon. Find a way to give the board members the opportunity to share their concerns: Add an agenda item: “What is it about the nonprofit that keeps you up at night?” Board members may be concerned about issues that no one else has thought of. As board members engage in strategic planning they should ask, “What can go wrong?” and “What can we do to minimize bad results?” Ideally, work towards a culture where each board member thinks of him/herself as a resource in risk management for the organization.

  • The Nonprofit Risk Management Center’s publication, Pillars of Accountability, is a resource that addresses risk management from a board’s perspective.

We want to expand our mission to add various activities — how can we do that and still maintain our tax-exempt status?

By asking this question you have passed the first test of becoming a great risk manager! You are asking whether what you want to do is within the mission. In some cases the mission statement may be broadly worded and no changes will be necessary. Often, however, the existing mission statement is too narrow. Your board should determine whether or not to amend the mission statement. The mission statement may or may not be the same as what is written in the “certificate” or “articles of incorporation” or corporate charter that was filed with the state when your nonprofit was formed. That is the language that the IRS evaluated when the nonprofit applied for and was granted tax-exemption. Accordingly, if the corporate purpose clause of the articles of incorporation needs to be changed, that must occur by following the state law requirements for amendments to the articles of incorporation, and then the amended filing should be forwarded to the IRS with your organization’s next annual 990 filing. A shift in the nonprofit’s programs or activities should also be reflected on the annual 990, even if the change was not so significant as to warrant an amendment to the articles of incorporation.

  • The IRS web site includes an explanation of what it wants to see when a nonprofit makes significant changes to its governing documents.

We changed our bylaws. Do we have to inform the IRS?

Yes. Organizations are required to inform the IRS of “structural and operational” changes in conjunction with the organization’s annual 990 filing. Your state charitable registration procedures may also require you to submit a copy of amended governing documents, such as bylaws.

  • The IRS web site includes an explanation of what it wants to see when a nonprofit makes significant changes to its governing documents.

Our Determination Letter is outdated because our organization just changed its name.How do we get an updated ruling letter from the IRS?

For an updated Determination Letter (or a copy in the event you can't find your original letter) write the IRS Exempt Organizations Determinations office, P.O. Box 2508 Cincinnati, OH 45201, or call the EO HelpLine of the IRS: 1-877-829-5500 and inquire about the fax number to which you can send a written request. In addition to credit card information for copying charges, you will need to provide the name, title, and daytime phone number for the charity officer making the request; the name of the organization (and all former names if the name has changed); the organization's address (or the original address if the organization has moved); and the organization's EIN number.Receiving the documents could take a few months.

  • At the same time, you may also request a copy of the organization's original application for tax exemption, if you don’t have a copy (which you should have: you are required to provide it in response to requests from the public).
  • Contact information for the IRS: You may direct technical and procedural questions concerning charities and other nonprofit organizations to the IRS Tax Exempt and Government Entities Customer Account Services at (877) 829-5500 (toll-free number).

We’re a small nonprofit with under 25K in annual revenue. Do we have to file an annual tax form with the IRS?

Beginning in 2008, small tax-exempt organizations (averaging less than $25K in annual gross receipts) that previously were not required to file returns will be required to file an annual electronic notice, Form 990-N, also known as the e-Postcard. The annual filing is due by the 15th day of the fifth month after the close of the organization’s fiscal year. Failure to file for three consecutive years will result in revocation of tax-exempt status.

  • The IRS web site offers detailed information on the new e-Postcard filing requirement.

We’re a church. Do we have to file an annual report with the IRS?

In general, churches and church-affiliated/religious organizations are exempt from the annual filing requirement. There may, however, be risk management reasons to submit the filing anyway. For instance, if the religious organization is also involved in social services and seeks grants from foundations and other funding sources outside of its religious community, it may wish to be transparent about its operations and finances which can be achieved through submission of the annual IRS Form 990.

  • The IRS web site offers a detailed list of the exceptions to the annual filing requirement that apply to churches and religious organizations.

Is it a conflict if our Executive Director is also on the board as President?

There is a conflict if the Executive Director is paid, because every decision the board makes relating to budget and compensation will impact the ED. Many organizations accept this conflict and manage it by excusing the paid ED from discussions involving the budget and compensation. They have decided that it is important for their ED to have a vote and sit at the table as a peer of the other board members.. Other organizations feel more comfortable with the board serving in the role of supervisor of the chief paid staff leader. It is more common for the board to serve as the employer of the ED who is invited to attend board meetings as a "guest" (as opposed to a voting member) albeit a very critical one, since s/he usually has a vital role in setting the agenda and helping to shape the work of the board. Another consideration to be aware of is that the compensation of board members is reported on an organization's annual report to the IRS, Form 990. Since the vast majority of public charities do not compensate board members, your organization will stand out to those reviewing the 990 because the compensation of the executive director, who also serves on the board, will be reported as board compensation on the 990.

See the following resources on the Center's web site for guidance in managing conflicts:

Our nonprofit needs to retain legal counsel and we are not sure where to begin. Do we need to have a signed agreement with an attorney? Who should the attorney report to? the Board of Directors or the staff of the agency?

If you need to retain legal counsel because of a claim that has been filed against your nonprofit (or your knowledge of a potential claim) you are required to contact your insurance professional(s) to alert to them to the legal action/potential legal action. The nonprofit’s insurance policy(ies) may provide for the insurance carrier to defend the claim(s) against the nonprofit, in which case the carrier will identify the appropriate legal counsel and the attorney/client relationship will be between the insurance carrier and the attorney. (If you do not provide notice to the insurance carrier, the carrier may deny the claim.)

In other situations, the board of directors may forge the relationship with legal counsel and the attorney generally then reports to the board — in some organizations the staff rather than the board identifies and recommends legal representation, with approval from the board. In those situations the chief staff officer is usually the primary “relationship manager” with outside counsel. If the chief staff officer has authority, s/he may sign a retainer letter with the law firm/attorney selected. Otherwise the Chair of the Board may be the appropriate person to sign the retention letter. In either case, it is wise to have a signed agreement, and to know up front what the fee schedule and costs charged to the nonprofit will be. Assuming that actions of board and staff are authorized, or within the scope of authority as a board/staff member, then the attorney for the nonprofit will also represent any individual board or staff members involved in a lawsuit.