Steering clear of personal liability
Participation in non-profit organizations (NPOs) is often a rewarding experience. However, this experience can become a nightmare for participants if things go wrong, such as if money goes missing, someone suffers an injury, or the organization breaks a law. In these cases, participants can be held personally liable for the damages or losses. The following is a brief overview of how to reduce your exposure to liability in NPOs.
Liability as Members
NPOs typically fall into two categories: unincorporated associations or incorporated entities. An unincorporated association is a collection of individual members who agree to pursue common objectives. An incorporated entity is a corporation or society that is recognized under the law as separate and distinct from its members. From a liability standpoint, the key difference between the two is that while members of the former are exposed to unlimited liability for the organization's acts, members of the latter are not. To avoid liability, ensure that the NPO is incorporated by searching for the NPO at corporate registries. Also, since incorporated entities become unincorporated associations if it fails to file annual returns as required under the law, members of incorporated entities should ensure that the Board of Directors complies with this requirement.
Liability as Volunteers
Simply volunteering with an NPO does not usually expose you to liability for the NPO's acts. However, if you volunteer as a director or officer of an NPO, you have certain legal duties. These duties include the following:
(a) to act honestly and in good faith with a view to the best interests of the organization; and
(b) to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
These duties are generally the same as those of directors and officers of for-profit corporations but with one important difference. The degree of care, diligence and skill that a director or officer of an NPO must exercise depends upon that person's actual skills and experience. Therefore, directors and officers in NPOs who have superior or unique skills and experience will be held to a higher standard than other directors and officers in the same organization. In contrast, the directors and officers of for-profit corporations are generally held to the same standard regardless of their personal skills or experience.
Furthermore, the duty to act honestly and in good faith is generally higher and more onerous for directors and officers of NPOs that are legally recognized as charitable organizations than of other types of NPOs.
Some steps to minimize your risk are:
- understand the objectives, bylaws, and structure of the NPO;
attend all meetings, actively participate in decision making, and take accurate, detailed notes on what happened;
- make decisions only when all necessary information is available, and obtain input from professional advisors when required;
- when duties are delegated, ensure that these duties are satisfactorily completed;
- when objecting to a decision, ensure the minutes of the meeting state your objection;
ensure that the activities of the NPO comply with all legal requirements and with the non-profit objectives of the NPO;
- scrutinize financial statements to ensure that funds are being used appropriately; and
- promptly disclose any conflicts of interest.
To reduce your risks further, the non-profit organization should acquire and maintain directors' and officers' liability insurance for you and the bylaws of the non-profit organization should contain an indemnity clause which states that the organization will reimburse you for any liability you incur as a consequence of serving as a director or officer.