Legal Responsibilities When Serving on a Nonprofit’s Board of Directors
By Bruce Waterhouse, Member
Serving on a nonprofit Board of Directors can have many advantages, from advancing altruistic purposes to making valuable personal and professional contacts. Such positions also carry significant responsibilities and can present serious legal obligations and risks for both the Board Member and the organization if not approached with care and attention.
The members of a nonprofit Board of Directors or other governing body are entrusted to act on behalf of the organization’s various constituents, including recipients of services, its members (if any), its contributors and grant funders, the various levels of government, and taxpayers.
The law imposes duties on each individual Board Member and the Board as a whole. Ohio’s Nonprofit Corporation Law requires each Board Member to perform duties in good faith (with intent to benefit the corporation in all its endeavors and to refrain from receiving personal advantage at the expense of the corporation), in a manner reasonably believed to be in the organization’s best interests, and with the care a prudent person in a like position would use under similar circumstances.
The Board as a whole is ultimately responsible for a nonprofit’s performance, including ensuring full compliance with all applicable laws. Some of the most significant requirements include:
- For nonprofits that are charitable organizations, annually filing a Form 990 with the IRS and making it available to the public. Each Board Member should review the 990 for accuracy before filing.
- Protecting the organization’s tax-exempt status, including ensuring that none of its earnings improperly inure to any individual, and guarding against prohibited political activities to promote candidates (although limited lobbying to influence legislation is permissible).
- Preventing any “excess benefit transactions” involving the Board or staff. Any business relationship with members, Board Members, officers, employees, or other private persons must be carefully scrutinized to ensure only reasonable compensation is paid for services rendered.
- Accounting for, reporting, and paying required taxes on any “unrelated business Income.”
- Withholding taxes and other required withholdings from employees’ pay and remitting to the appropriate taxing authorities. The organization must comply with general employment laws, e.g., the Americans with Disabilities, Occupational Safety and Health, Fair Labor Standards, and Family Medical Leave Acts.
- If applicable, making the required filings with the Ohio Attorney General’s Charitable Law Section as a “Charitable Trust” and obtaining authority to solicit “Charitable Solicitations.”
- Complying with all terms and conditions of grants and donations, with the understanding that promises made to donors are legally binding.
- Keeping correct and complete books and records of finances, and meeting minutes. Any member or Board Member may examine all books and records for any reasonable and proper purpose at any reasonable time.
While this may seem like a daunting list, service on a nonprofit board also can be a highly worthy way to give back to your community, and individual board members can take proactive steps to meet their responsibilities while protecting themselves. Our attorneys form, represent, and counsel a variety of nonprofit and tax-exempt entities and would be happy to answer any questions that arise if you are serving such an organization as a member of its Board.