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.”