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Are Board Members Personally Liable for a Nonprofit's Debts?

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Question: Are Board Members Personally Liable for a Nonprofit's Debts?

A reader writes: "I have a question regarding serving on a Board of Directors for a nonprofit. Someone told me that the board of directors' personal assets would be the first to be seized should the nonprofit fail. Is that true?"

Answer:

No. A fully incorporated nonprofit enjoys the same limited liability that any corporation does. Corporations offer the protection of limited liability to corporate directors and officers. This is important, especially if the organization takes in and expends significant sums of money, buys property, hires employees, or enters into leases and contracts.

What limited liability means is that the organization's directors and officers have limited personal liability for business debts. Creditors can only go after corporate assets and insurance to satisfy liabilities incurred by the corporation.

This principle applies, however, only when the board has fulfilled its basic duties, such as the duty of care. Board members are legally bound to "exercise reasonable care when he or she makes a decision for the organization. Reasonable care is what an 'ordinarily prudent' person in a similar situation would do." In the business world some boards have been liable when they did not fulfill this requirement...just think Enron.

Most experts do recommend that nonprofits purchase "Directors and Officers" (D & O) liability insurance to protect against certain kinds of lawsuits and other kinds of litagation.

See Does Our Nonprofit Need Liability Insurance? and Before You Incorporate as a Nonprofit - Pros & Cons

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  7. Are Board Members Personally Liable for a Nonprofit's Debts?

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