Reduce nonprofit officer, director liability
Officers and directors in many states may be able to partially immunize themselves from liability for some kinds of risks by amending their nonprofit corporation’s articles of incorporation to include special language provided by statute. There are two broad drawbacks to making those amendments. First, amendments to articles of incorporation usually require the consent of the members of the nonprofit corporation (if your nonprofit corporation has members). It’s a little awkward for officers and directors to ask the persons who select them to immunize them from the consequences of their own conduct. Second, the immunity is limited in scope. Officers and directors remain liable for their actions and inactions in each of the following areas.
Breach of the duty of loyalty
A breach of the director’s duty of loyalty to the nonprofit corporation cannot be excused, and to the extent a director violates the duty of loyalty he will remain liable even if the statutory immunity has been put in place. An example: a director who is on the board of two different nonprofit corporations applying for the same grant has hopelessly compromised his duty of loyalty. No matter which nonprofit gets the grant, the other can accuse him of a breach of his duty of loyalty.
Acts not in good faith
A director is liable for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law. To the extent a director is not acting in good faith, or knowingly violates the law, he will remain liable even if the statutory immunity has been put in place. An example: a director who agrees to accept a donated painting, in return for agreeing the painting has a value higher than an appraisal shows, has engaged in a knowing violation of the law, and will be liable.
Improper personal benefit
A director will be liable for a transaction from which the director derives an improper personal benefit, even if the statutory immunity has been put in place. An example: a director who is also an insurance agent, and writes insurance policies for the nonprofit corporation, and receives a commission, has derived an improper personal benefit.
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