A non-profit organization is an organization which is legally constituted organization and whose primary objective is to support or to actively engage in activities of public or private interest without any commercial or monetary profit purposes. NPOs are active in a wide range of areas, including the environment, humanitarian aid, animal protection, education, the arts, social issues, charities, early childhood education, health care, politics, religion, research, sports or other endeavors.

In an ideal world, the board members of a nonprofit organization are altruistic individuals with a sincere commitment to their agency’s mission. They are aware of what it means to serve on a board, and they fully understand their responsibilities and liabilities. However, this utopian situation most often is not the reality for nonprofits. Therefore, it is vital that board members are made aware of their liabilities and responsibilities and those they strive to minimize the risk of liability for both themselves and for the organization.

Non-profit organizations include charities or service organizations; they may be organized as a not-for-profit corporation or as a trust, a cooperative, or they may be purely informal. Sometimes they are also called foundations, or endowments that have large stock funds. A very similar organization called the supporting organization operates like a foundation, but: they are more complicated to administer, they are more tax favored, and the public charities that receive grants from them must have a specially determined relationship. Most foundations give out grants to other NPOs, or fellowships and direct grants to participants. However, the name foundations may be used by any not-for-profit corporation even volunteer organizations or grass roots groups.

Most experts consider the legal and ethical restrictions on the distribution of profits to owners or shareholders as what fundamentally distinguishes NPOs from commercial enterprises. The use of the term “not-for-profit” rather than “non-profit” has been debated within the field. While there are definitive preferences for one term or the other, there is no broad consensus.

Non-profit organizations generally do not operate to generate profit, a characteristic widely considered to be defining of such organizations. However, an NPO may accept, hold and disburse money and other things of value. It may also legally and ethically trade at a profit. The extent to which it can generate income may be constrained, or the use of those profits may be restricted. NPOs therefore are typically funded by donations from the private or public sector, and often have tax exempt status. Donations may sometimes be tax deductible.

Non-profits are operated by either volunteers or paid positions. Recently, some paid positions have come under question as the salaries of top level executives were in the millions of dollars per year. Additionally, an NPO may have members or participants or beneficiaries or students etc. as opposed to customers in a for-profit organization. One should not generalize about the comparative cost of a “non-profit” versus “for profit” organization; there may be a lot of internalized profit in a non-profit organization.

In most countries have laws which regulate the establishment and management of NPOs and which require compliance with corporate governance regimes. Larger organizations are required to publish their financial reports detailing their income and expenditure for the public. In many aspects they are similar to business entities though there are often significant differences. Both non-profit and for-profit entities must have board members, steering committee members, or trustees who owe the organization a fiduciary duty of loyalty and trust. A notable exception to this involves churches, which are often not required to disclose finances to anyone, not even its own members if the leadership chooses.

Daniel Kurtz states that despite the fact that nonprofit board members are volunteering their time as lay leaders, they still have certain legal obligations to the agency. This responsibility that he refers to involves a duty of care, a duty of loyalty, and a duty of obedience. Daniel Kurtz then goes on to clarify the meaning of each of these duties.

Board members are obligated to demonstrate honesty and good faith when carrying out their various functions in an organization. Also included in this duty is the responsibility of volunteers to maintain a level of confidentiality with regard to sensitive information. Daniel Kurtz goes on to mention that “the obligation to maintain confidentiality continues indefinitely, not just until the volunteer’s position expires.

Board members and prospective board members of non-profit organizations often worry about the potential for personal legal liability if the organization should get into financial trouble or if they should be sued for a negligent act or omission. This concern is becoming so prevalent that, in this time of heightened concern about legal liability, organizations sometimes have trouble recruiting good people to their boards.

Often the source of these anxieties can be traced to some popular misconceptions that are repeated all too often by well-meaning but misinformed members of the public or by insurance agents who want to sell board liability insurance.

The agency that grants and monitors the incorporation of Societies, out of a desire to be helpful, contributes unnecessarily to these anxieties by seeming to urge incorporated groups to buy unneeded insurance policies. Some government funding agencies have taken it upon themselves to advise that groups to buy expensive board liability insurance in the misguided belief that the group’s insurance will limit the Government’s exposure to liability claims.

So what’s needed is some straight talk and some clear information. Let’s deal first with debt, because it is in many ways the easiest. As a rule, if the organization is incorporated (under the Societies Act or otherwise), there is little or no real chance that the individual board members would be required to pay the organization’s debts personally, unless, of course, they signed a personal guarantee or in some other way assumed personal responsibility for the debt. That is because the debts are the debts of the corporation (a registered, paid up society is a “corporation”), and not a personal debt of the individuals serving as its directors.

The main exception to that rule is for amounts owing to the government as source deductions made from employees wages (Income Tax, EI, CPP, Workers Comp) and not remitted to the Government. In such a case board members may be held personally liable for those amounts where they cannot demonstrate that they acted with due diligence in causing them to be remitted. This liability arises directly from the relevant statutes. Fraud, theft and criminal acts are other exceptions, although they are very rarely seen.

Then there is the question of liability for wrongful acts or omissions (torts) committed by the organization or by the board or by an employee. The same general rule applies here: individual board members of incorporated bodies are not personally liable for damages caused by the organization or its staff. At one time it might have been argued that, if a volunteer board member personally made an error or omission that caused harm to a third party, that board member may have been personally liable as well as the organization.

The Volunteer Protection Act says that volunteers of any non-profit organization (which includes a society, a municipality, a school board, a regional library board or a hospital), directors and officers specifically included, are not liable “for damage caused by an act or omission of the volunteer on behalf of the organization”. “Damage” under this Act” includes both physical and non-physical losses and both economic and non-economic losses”. The Volunteer Protection Act requires only that the volunteer must have been acting “within the scope of his/her authority” within the organization at the time of the act or omission and that the volunteer was properly licensed or certified to carry out that activity, if the law required any such licenses or certification.

There are some exceptions to the statutory exemption from liability, of course, but they are really quite minimal. There is no exemption from liability if “damage was caused by willful, reckless or criminal misconduct or gross negligence by the volunteer” or if “the damage was caused by the volunteer while operating a motor vehicle, vessel, aircraft or other vehicle for which the owner is required by law to maintain insurance” or if “the act or omission which caused the damage constitutes an offence” or if “the volunteer was unlawfully using or impaired by alcohol or drugs at the time of the act or omission which caused the damage”. It must be noted, of course, that even if the organization had board liability insurance it would likely be invalid in the circumstances amounting to the exceptions under the Volunteer Protection Act for conduct amount to “gross negligence” or unlawful activity.

Indeed, board liability insurance wouldn’t be of much help in a case of failure to remit source deductions either, because it involves a breach of a statute and insurance is generally not available where an insured has broken the law. For these reasons, I would not hesitate to reassure voluntary board members that they have little to fear when joining a voluntary non-profit or (unpaid) civic board in relation to their personal liability and, that for the most part, and unless there are very unusual circumstances present, special board personal liability insurance is a huge waste of the organization’s precious resources.

Prudent organizations will continue to maintain appropriate policies of general liability insurance covering the organization as a whole, as well as appropriate coverage for any special risks (for example, if alcohol is served at functions). And, of course, directors must make sure that their annual filings have been maintained with the Registry of Joint Stock Companies and that their annual fees are promptly paid.

Above all else, boards must act with due diligence in order to maintain the protection afforded by the corporate status of the organization. This involves good risk management and board governance habits including maintaining good record keeping practices for board meetings, proper financial and activity reports, ensuring that employee payroll deductions are being remitted as required, occupational health and safety awareness for the staff and volunteers, and having a realistic assessment of the risks associated with the organization’s programs and activities and insuring appropriately for those risks.

The next key point that Daniel Kurtz makes is with regard to the liability risk for a nonprofit organization. Any failure by a board member to abide by his/her fiduciary responsibilities as listed previously can ultimately lead to liability not only for the organization, but also potentially for the individual volunteer. Nonprofit organizations can be held liable for the acts or omissions of their volunteer leaders even if they were not approved or authorized by the association, as long as the volunteer reasonably appears to be acting with the association’s approval.

In addition, Daniel Kurtz addresses Congress’s passage of the Volunteer Protection Act, which excuses volunteers from liability for acts or omissions on behalf of nonprofit organizations if he/she was acting within the scope of his/her responsibilities, and the act or omission was not willfully or consciously committed or criminal in nature. Most nonprofits, when drafting their bylaws, also include legal coverage for volunteers to the fullest extent of the law.

An essential item seems to underlie Daniel Kurtz’s assertions. The author expresses the necessity of board members to review and be familiar with the organization’s articles of incorporation, bylaws, rules, and regulations. This takes for granted the fact that these items are both clear and effective, and it demonstrates the outstanding importance of each of these documents. (Daniel L. Kurtz, 1988)

While the fiduciary role is fundamentally the same for most nonprofit boards, each board’s specific responsibilities vary according to several factors,” says Axelrod. These include the organization’s size and scope, its developmental stage, the method of selecting board members, and whether the organization is managed primarily by staff or by volunteers.” These factors are typically covered in an organization’s articles of incorporation and/or bylaws (Axelrod, N. R., 1994). The more specific and lucid that these documents are, the more explicitly a volunteer leader can identify with his/her responsibilities.

Daniel Kurtz presents a concise argument regarding the incredible importance of board members understanding and adhering to the fiduciary responsibilities of volunteer leaders. The book is extremely well-written, and can be easily understood by all who have ties to nonprofit organizations, regardless of whether they are novices, or they have decades of experience under their belts (Daniel L. Kurtz, 1988). In particular, the bulleted list of tips for minimizing risk is extremely helpful for nonprofit board members.

Daniel Kurtz provides relevant information and practical suggestions for how board members can minimize the risk of violating their responsibilities to the organizations they serve. This is of tremendous significance for nonprofit managers as well. Not only should they themselves be familiar with Daniel Kurtz’s suggestions, but they should also work with volunteers to provide the necessary orientations and information, if appropriate. In other words, if it is apparent to a nonprofit manager that his/her board is unfamiliar an issue that could potentially place the agency in a compromising position, s/he should make a point of acquainting the board with the possible risks of liability.