A nonprofit director owes the organization three fiduciary duties under state law: care, loyalty, and obedience. Those duties define what you can be held personally responsible for, and they sit alongside a separate federal excise tax regime that can reach board members who approve improper financial deals. Understanding the nonprofit board fiduciary duties in plain terms, and knowing where the real liability lines fall, is the difference between confident service and an unpleasant surprise.
The Duty of Care
The duty of care requires you to stay informed and to participate in decisions with the attention a reasonably careful person would bring to a similar role. Read the materials before the meeting. Ask questions about the budget. Vote, rather than rubber-stamping whatever the executive director recommends.
The standard is not perfection. It is ordinary diligence in the same position. A director who chronically skips meetings or ignores warning signs about financial problems can be held personally liable for losses that follow from that inattention.
Two housekeeping practices are how the duty of care actually gets discharged. First, quorum: every meeting needs the minimum number of directors the bylaws require, and votes taken without a quorum are legally meaningless. Second, written minutes for every board and committee meeting. Good minutes record who attended, what was discussed, what alternatives were considered, and how each vote came out. If a director is later sued over a decision, those minutes are the primary evidence that the board deliberated before acting.
Virtual meetings are valid in most states as long as every participant can hear and communicate in real time, propose motions, object, and vote. Directors cannot vote by proxy at board meetings, so actual attendance, in person or remote, is required.
The Duty of Loyalty
The duty of loyalty requires you to put the organization’s interests ahead of your own. The most common violation is failing to disclose a conflict of interest. If you own a company that bids on a contract with the nonprofit, you must disclose the relationship before the board votes and then step out of the room for the discussion. Concealing the conflict can void the contract and expose you to a breach-of-duty lawsuit.
The obligation extends beyond financial self-dealing to any situation where personal or professional interests could compete with the nonprofit’s mission. That is why the IRS recommends every 501(c)(3) adopt a written conflict of interest policy to protect against charges of impropriety involving officers, directors, or trustees.1Internal Revenue Service. Form 1023 – Purpose of Conflict of Interest Policy Form 990 asks whether the organization has one, whether officers and directors disclose potential conflicts annually, and how the organization monitors transactions for conflicts.2Internal Revenue Service. 2024 Instructions for Form 990
A workable policy requires annual written disclosures from each director, describes how conflicts are evaluated, and mandates recusal from discussion and voting when a conflict exists.
The Duty of Obedience
The duty of obedience ties the board to the organization’s founding purpose. You must ensure the nonprofit operates within the boundaries of its articles of incorporation and bylaws, and that all activities support the tax-exempt purpose approved by the IRS. A homeless shelter that starts diverting funds to unrelated commercial ventures risks enforcement action from the state attorney general or revocation of its tax-exempt status.
The duty also means following internal governance procedures. If the bylaws require a two-thirds vote for certain decisions, a simple majority will not do.
Two federal rules give the duty of obedience much of its bite. A 501(c)(3) must be both organized and operated exclusively for exempt purposes, must avoid distributing earnings to private individuals, and must refrain from serving private interests rather than the public.3eCFR. 26 CFR 1.501(c)(3)-1 – Organizations Organized and Operated for Religious, Charitable, Scientific, Testing for Public Safety, Literary, or Educational Purposes Separately, 501(c)(3) organizations are absolutely prohibited from participating in any political campaign for or against a candidate for public office. That ban covers financial contributions, endorsements, and public statements of position made on the organization’s behalf, and violating it can result in revocation of tax-exempt status and excise taxes.4Internal Revenue Service. Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations Directors should confirm that neither the organization nor its staff engages in campaign activity, even informally through social media accounts associated with the nonprofit.
Obedience also covers the annual filing calendar. If a nonprofit fails to file its required annual return or notice for three consecutive years, the IRS automatically revokes its tax-exempt status. No warning letter, no appeal process.5Internal Revenue Service. Automatic Revocation of Exemption That is an oversight failure, and it lands squarely on the board.
Form 990 Review Is a Board Duty, Not a Staff Task
The annual Form 990 discloses executive compensation, program spending, fundraising costs, and a range of governance practices. The IRS asks whether the full board reviewed the completed Form 990 before filing and requires a description of the review process on Schedule O.2Internal Revenue Service. 2024 Instructions for Form 990 Boards that treat the 990 as a staff-only task miss one of their most important oversight opportunities, since the form summarizes the organization’s financial and governance health in one document.
The organization must also make its Form 990 and its original exemption application available to anyone who asks. In-person requests must be fulfilled immediately; written requests within 30 days. The organization may charge a reasonable copying fee plus postage.6Internal Revenue Service. Public Disclosure and Availability of Exempt Organizations Returns and Applications Many organizations satisfy this by posting their 990s on their website.
When a Board Vote Can Cost You Personally
The sharpest personal exposure for a director is the intermediate sanctions regime under Section 4958. When an insider receives compensation or other benefits exceeding fair market value from a tax-exempt organization, the IRS treats it as an “excess benefit transaction” and imposes excise taxes rather than simply revoking exempt status.
Different people face different rates. The disqualified person, meaning the insider who received the excess benefit, owes an initial tax of 25 percent of the excess amount. If they fail to return it within the taxable period, a second-tier tax of 200 percent kicks in.7Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions Any organization manager, including a board member, who knowingly approved the transaction faces a tax equal to 10 percent of the excess benefit, capped at $20,000 per transaction.8Internal Revenue Service. Intermediate Sanctions – Excise Taxes A director who opposed the transaction in a manner consistent with their responsibilities is not considered to have participated.
The practical defense is straightforward. Use comparable salary data when setting executive compensation. Document the process. Make sure conflicted individuals recuse themselves from the vote. These steps create a rebuttable presumption of reasonableness that shifts the burden to the IRS to prove the benefit was excessive.
What Protects You From Personal Liability
Fiduciary duties can sound alarming, especially for unpaid volunteers. Several layers of protection exist to encourage people to serve without betting their personal assets on every vote.
The Federal Volunteer Protection Act
Under federal law, a volunteer of a nonprofit is generally not liable for harm caused by their actions on behalf of the organization, provided the volunteer was acting within the scope of their responsibilities, was properly licensed if the activity required it, and did not engage in willful misconduct, criminal conduct, gross negligence, or reckless disregard for others’ safety.9Office of the Law Revision Counsel. 42 USC 14503 – Limitation on Liability for Volunteers The protection does not cover harm caused while operating a motor vehicle, and it does not apply to crimes of violence, hate crimes, sexual offenses, or civil rights violations.
The federal baseline is that honest mistakes by engaged directors generally will not produce personal liability. Deliberate wrongdoing or complete disengagement can.
Indemnification and D&O Insurance
Most nonprofit bylaws include an indemnification provision committing the organization to cover the legal expenses a board member incurs defending claims related to their service. Indemnification has a significant limitation: it only works if the nonprofit actually has the money to pay. A cash-strapped organization facing the same crisis that triggered the lawsuit may not be able to follow through.
Directors and officers (D&O) insurance fills that gap. A D&O policy typically includes three types of coverage: protection for individual directors when the organization cannot indemnify them, reimbursement to the organization for its indemnification costs, and coverage for the entity itself when it is sued alongside its directors. For a volunteer board member, the first type matters most, because it pays from the first dollar with no deductible when the organization cannot step in.
Whistleblower and Document Retention Rules
Two provisions of the Sarbanes-Oxley Act apply to all organizations, including nonprofits. One makes it a federal crime to retaliate against an employee who reports suspected illegal activity, whether by firing, demoting, harassing, or passing the person over for promotion. The other criminalizes destroying documents to prevent their use in a federal investigation.
Form 990 asks whether the organization has a whistleblower policy, and adopting one signals to staff and volunteers that they can report problems without fear of retaliation. Exempt organizations also must maintain books and records sufficient to demonstrate compliance with tax rules, including documentation of all income, expenses, and credits reported on annual returns. This applies even to organizations that file only the simpler Form 990-N electronic notice.10Internal Revenue Service. EO Operational Requirements – Recordkeeping Requirements for Exempt Organizations A written retention policy specifies how long different categories of records are kept, who is responsible, and the process for destroying documents once the retention period expires. Given the Sarbanes-Oxley prohibition on destroying records relevant to federal proceedings, the policy should include a litigation hold provision that suspends routine destruction when legal action is anticipated.
State Attorney General Oversight
State attorneys general are the primary regulators of nonprofit organizations in most jurisdictions. They have authority to investigate whether charitable assets are being properly managed, whether directors are fulfilling their fiduciary duties, and whether the organization is operating in compliance with state law.11National Association of Attorneys General. Charities Regulation 101 Depending on the state, the attorney general can seek removal of directors, require corrective action plans, impose compliance monitoring, or petition to dissolve the organization entirely.
Fiduciary breaches, then, are not just a federal excise tax question. A state enforcement action can target directors directly, which is another reason the routine practices, reading the packet, asking the questions, disclosing conflicts, documenting the vote, are the ones that actually keep board members out of trouble.