Business & Work

A nonprofit organization does not have owners. It has a board of directors. Directors make decisions for and in the best interests of the organization.

Directors of a nonprofit

The directors are responsible for managing the organization. They make most of the important decisions about how the organization operates. Generally, directors are not employees of the organization. A board must meet at least once a year, but meeting more often is recommended. When the board meets, meeting minutes or notes should be taken to maintain good corporate governance. 

Through the organization's bylaws, the board of directors is empowered to make decisions on behalf of the organization. 

The bylaws explain these and other matters, such as:

• Who elects the directors,
• When they are elected,
• How long they will serve as directors, and
• And how to remove a director.

As a group, the directors make up the board of directors.

Fiduciary duties

Similar to for-profit companies, nonprofit directors have fiduciary duties. These are the duty of care and the duty of loyalty. In some states, directors owe a third fiduciary duty, the duty of obedience. These duties are seen through the lens of helping the organization's mission. 

The duty of care generally requires directors of nonprofit boards to act: 

• In good faith,
• In a way the director reasonably believes is in the best interests of the organization and in furtherance of the organization’s mission, and
• With the care an ordinarily prudent person in that position would exercise under similar circumstances. 

To exercise the duty of care, directors of nonprofit boards must:

• Actively participate in the management and operations of the organization,
• Protect, preserve, and manage the organization’s charitable assets and property, and
• Maintain the required knowledge of the organization’s affairs and ensure good governance by keeping accurate board meeting minutes, adopting a record retention policy, and ensuring that the proper internal controls are in place and routinely updated.

The duty of loyalty generally requires directors of nonprofit boards to act with undivided loyalty to the organization. Directors must prioritize the interests and mission of the organization over their own personal and professional interests. To exercise the duty of loyalty, directors of nonprofit boards must:

• Recognize and disclose conflicts of interest and adopt a conflict of interest policy,
• Recuse themselves or step away if there is a vote or decision that could benefit them or their family or be a conflict,
• Strictly follow the principles of the Corporate Opportunity Doctrine, and
• Protect all confidential information.

In the states where this fiduciary duty is recognized, the duty of obedience generally requires directors to ensure that the organization follows applicable laws and regulations while pursuing its mission. Directors must follow the organization’s own policies and procedures. They also must not engage in unauthorized activities. 

See the General Not For Profit Corporation Act of 1986 for more information, including information about the Corporate Opportunity Doctrine.

It is rare for a director to be held legally responsible and personally liable for the actions of a nonprofit, but it can happen. Some situations that could lead to personal liability include: 

• Intentionally causing injury, harm, or damage to people or property,
• Participating in wrongful actions of the organization’s employees, and
• Approving criminal acts. 

Nonprofits often purchase liability insurance to cover the actions and decisions of the organization and its officers and directors.

The executive director of a nonprofit

The first employee hired by the board is usually the executive director. The executive director position should not be confused with the director or officer roles. The executive director runs the day-to-day operations of the organization. They take direction from the board. Generally, other employees can be hired by the board or by the executive director, depending on any constraints in the organization's bylaws.

Officers of a nonprofit

The officers of a nonprofit board of directors usually include:

• A President,
• Vice President,
• Secretary, and
• And a Treasurer.

Sometimes other titles are used: Chairperson or Vice-Chairperson. The titles of the officers and a description of the officers' responsibilities should be included in the bylaws.

The officers run the board meetings, sign significant contracts, and keep meeting notes. The officers are asked to fill those roles by the other members of the board and are usually not paid.

The bylaws should have:

• A job description for each officer,
• A description of how officers are chosen, and
• Instructions on how to remove an officer from their position.

It is common in smaller, newer organizations for one person to fill two officer roles. For example, if the organization has a board of directors with only three people on it, each person is a director and an officer of the organization.

Employees of a nonprofit 

The employees of the organization are responsible for following the rules and direction of the board of directors. They should make decisions at the direction of the board of directors. 

Volunteers can be managed by the employees.

Paying a board of directors

It is not against the law to pay nonprofit officers and directors, but it is uncommon and often not recommended because of conflict of interest issues that could arise. A corporation's bylaws outline whether directors of a company receive compensation. A new nonprofit organization should try to use volunteers. Rather than paying directors, money should be used to advance the organization's mission. If directors of a nonprofit receive compensation, there may be tax implications. In this case, you should talk to a lawyer and an accountant.

The Internal Revenue Service (IRS) worries about overpaying the board of directors and employees of nonprofits. It is better not to pay directors. Directors can be reimbursed for certain expenses related to carrying out their duties as a director,  such as car mileage. The executive director and other employees may be paid reasonable compensation.