Board Members Hard At Work.

Leah Ryals Jacobs

In our last blog post, we discussed the three main duties a nonprofit board member should be aware of. But isn’t there more? That seems pretty simplistic. Well, I am glad you asked. There are a few other things you should keep in mind while operating as a board member for a nonprofit organization.

As a board member, you should also be aware of certain disclosure standards, as well as indemnification issues for directors and officers of nonprofit boards.

Disclosure Standards

There are two types of disclosure standards I would like to bring to your attention. First, looking back to the duty of loyalty, we have a duty to disclose any potential or actual conflicts of interest. Although this area seems quite straightforward, there are a few items to think on that might not automatically come to mind in regard to conflicts. Board members and directors should be looking for any relationships or actions that could lead to actual, perceived, or apparent conflicts of interest. These should be disclosed to the Board immediately. Relationships that should be disclosed, even if it was the board member’s spouse/partner or dependent, include the following: consulting fees; speaker’s bureau; equity interests (or entitlement thereto) in a publicly or non-publicly traded company; royalty income (or the right thereto); officer, trustee, director or any other fiduciary role (whether or not compensation is received for services); ownership or partnership; research grants from a financially interested company; fellowship support; salary; intellectual property rights. These types of relationships may potentially influence a board member or director’s objectivity in matters relating to the nonprofit. The best policy for any nonprofit is to have an open conversation regarding potential and actual conflicts, and attempt to maintain a culture of full disclosure.

organizations should be aware that they are subject to public inspection of their exemption applications, determination letters, and annual returns

Federal tax law also applies certain disclosure requirements to nonprofit organizations (excepting charitable organizations). These include exemption applications and determination letters, annual returns (otherwise known as Form 990), dues used for nondeductible lobbying and political campaign activities, and solicitation notice that contributions are non-deductible for federal income tax purposes. These organizations should be aware that they are subject to public inspection of their exemption applications, determination letters, and annual returns. The IRS will also make these available for public inspection and copying. There are additional nuances to the requirements under Federal tax law that makes it strongly advisable for nonprofits to consult with a knowledgeable Certified Public Accountant on these matters to ensure full compliance.

Idemnification of Directors and Officers

The next topic we are covering is of specific interest, if only because many board members and directors do not realize the potential liability they carry in their positions. In general, directors, officers, employees and members are typically protected from liability for the nonprofit’s debts or liabilities. There are a few exceptions to this rule, however. If a protected individual personally or directly injures another party, they may bear personal liability for this action. Personal guarantee of a bank loan or business debt where there is a default can also trigger personal liability. Board members and directors should ensure taxes are deposited (i.e. payroll, property, etc.) and that all necessary tax returns are filed. Otherwise, this can trigger personal liability. This may, in fact, be the largest area of concern for board members and directors, as it poses the potential for the most risk. If a nonprofit cannot pay taxes, or fails to pay applicable taxes, and closes its doors, the Internal Revenue Service may look to the board of directors for payment of tax money owed. Furthermore, the insurance many organizations have to cover their director and board members does not typically cover unpaid taxes. Another area of potential personal liability is when there is intentionally fraudulent, illegal, or clearly wrong action that causes harm. Finally, the co-mingling of nonprofit and personal funds triggers personal liability. While insurance may be acquired to cover some of these exceptions, it does not always cover each one. It is also important to check your state’s nonprofit laws to verify if any further protections are offered for nonprofit volunteers who act in good faith.

So I hope I haven’t left you a bit scared with all of these duties and standards. However, it is my firm belief that nonprofit board members should be cautious and always aware of the requirements placed upon them. When operating with a full understanding of what is expected, you have a much better chance of serving the nonprofit board successfully. If you or other members of your board need further information, contact us for a consultation or board training session at 501-819-2553. We look forward to hearing from you soon!