Starting and Managing a Nonprofit Organization: A Legal Guide

By Bruce R. Hopkins | Go to book overview

CHAPTER TWENTY-FIVE
Avoiding Personal Liability

Of all the labels that might be applied to U.S. society in the opening years of the twenty-first century, the Age of Litigation often seems the most appropriate. These days, it seems, anyone can sue someone else for just about any reason and for enormous amounts of money. The only restraint (which is rarely applied) is a judge’s rejection of a frivolous lawsuit or a state’s principles of legal ethics limiting a lawyer’s ability to bring unwarranted litigation.


AVOIDING PERSONAL LIABILITY

There are six ways in which an individual who is a director (or trustee) or officer of a nonprofit organization can avoid personal liability. Five of these ways are listed subsequently, amplified with checklists and chapter references. The sixth way is this: The individual should, at all times, engage in behavior that prevents (or at least significantly minimizes) the possibility of personal liability even if the organization itself is found liable. The individual is a fiduciary and has a duty to act in a prudent manner. Constant awareness of that duty offers a measure of self-protection.

Here are the ways to avoid personal liability while fulfilling the spirit and the rules of fiduciary responsibility.


(a) Understand the Organization

Learn about the legal form of the organization and its structure. For example, if the organization is a corporation, obtain copies of its articles of incorporation and bylaws, and read them. Compare the organization’s operating methods with the structure and procedures that are reflected in these documents. (One common problem is that an organization is operating as a membership organization even though its articles of incorporation state that it shall not have members. In an extreme example, a venerable organization was happily operating for decades, until one of its new directors happened to read the articles of incorporation. The document stated that the organization “shall cease to exist” as of 1946!)

Checklist

Articles of incorporation and bylaws

Application filed with the IRS to secure recognition of tax-exempt status (Chapter 6)

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