Many nonprofits choose to incorporate as a nonprofit corporation. One good rationale for doing this is the more robust personal liability protections that a corporation offers to its directors. Although California law gives unincorporated nonprofit associations a degree of protection, a corporation’s liability protections are substantially more robust. Liability matters most in times of crisis—for example, if a crime is committed on church property—but it should also concern directors of any church that has employees, works with children, or owns substantial property.
California law limits the personal liability of directors and officers of religious and secular nonprofit organizations under many circumstances, as long as they have acted in good faith and in the best interests of the nonprofit. However, the limited liability provided by legal entities has certain important limits that are worth keeping in mind for directors and officers:
- Leaders and agents can be held personally responsible for obligations that they personally assume. For example, offering a personal guarantee that the organization will pay a debt may create a personal obligation.
- Individuals can be held personally responsible for the consequences of torts, like causing a personal injury or committing an act of fraud.
- Directors can become personally liable to the organization or other stakeholders if they breach their fiduciary obligations in certain ways.
- Certain transactions that qualify as self-dealing or excess benefit transactions under tax rules may expose the directors and officers involved to tax liability.
- If a nonprofit has unpaid taxes and closes its doors, the IRS may look to the nonprofit’s directors for payment.
Prudent directors who understand the legal risks will undoubtedly opt for Directors & Officers (D&O) insurance to protect themselves and others in the organization from exposure to personal liability. A key benefit of D&O insurance is that it will cover legal fees for a director or officer who is sued for the types of claims that are covered.
The Church Law Center of California advises religious and secular nonprofits on governance and risk management matters. To find out how we can assist your organization, call us today at (949) 245-3177 or reach out to us through our contact page.