Serving Your Community Without Being Served a Summons: Fiduciary - - PDF document

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Serving Your Community Without Being Served a Summons: Fiduciary Responsibilities of Not-for Profit Boards

• N. Elizabeth McCaw, Esq.

Retired Shareholder, Stokes Lawrence, P.S., Seattle

• I. Introduction

Service on the Board of Directors of a Washington not-for-profit organization is a complex compilation of a variety of duties, obligations and activities, some fiduciary and others purely volunteer. This paper provides an overview of some of the key legal fiduciary duties mandated by Washington state law as well as tips for fulfilling those duties and limiting your personal liability as a director or officer of a Washington not-for-profit corporation. For a more comprehensive discussion of the subjects of forming and governing a not-for-profit corporation in the State of Washington, please see the Washington Nonprofit Handbook available online in the “Legal Resources” section of the website of Washington Attorneys Assisting Community Organizations (www.waaco.org).

• A. Tax-Exempt Status - What Does 501(c)(3) Mean?

The majority of laws that pertain to the creation, organization, and administration of a not-for-profit organization are state laws. Almost every not-for-profit organization is formed under a state statute (few, such as the American Red Cross, are chartered by federal law). However, federal law governs whether or not an organization will be tax-exempt and because tax-exempt status and the attributes that go along with tax-exempt status are essential elements to the organizational structure and operation of a not-for-profit organization, it is helpful to start with a basic understanding of the federal tax laws that determine tax-exempt status. A “tax-exempt organization” refers to a not-for-profit organization that is exempt from federal income taxation. There are approximately 30 categories of tax-exempt organizations defined under the Internal Revenue Code (the “Code”). From a fundraising standpoint, the most preferred category is described in section 501(c)(3) of the Code, because contributions to a 501(c)(3) organization are deductible by the donor for income tax purposes. Thus, “charities” as you most likely think of them are 501(c)(3)

• rganizations. Code section 501(c)(3) recognizes as tax-exempt “[c]orporations, and any

community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or education purposes, or to foster national

• r international sports competition..., or for the prevention of cruelty to children or animals, no

part of the net earnings of which inures to the private benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on any propaganda, or

• therwise attempting to influence legislation..., and which does not participate in, or intervene in

(including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for political office. IRC § 501(c)(3).

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There is no entitlement to tax exemption. A not-for-profit organization that claims exemption from federal income taxation under section 501(c)(3) of the Internal Code must apply to the Internal Revenue Service for recognition of its exemption by filing IRS Form 1023 (Application for-Recognition of Exemption under Section 501(c)(3)). All not-for-profit organizations that are recognized as tax-exempt are classified by the IRS as either private foundations or publicly supported organizations (or “public charities”). Most tax-exempt not-for-profit organizations are classified as public charities under Code sections 509(a)(1) and 170(b)(1)(A)(vi) or Code section 509(a)(2). Private foundations are subject to greater federal regulation. Donations to private foundations are not tax deductible to the same extent as donations to publicly supported organizations. A not-for-profit organization that wishes to qualify as a public charity must pass a “public support test,” which is determined based upon the financial information reported to the IRS annually.

• B. Summary of Tax-Exempt Basics

 A not-for-profit organization must make application to the Internal Revenue Service in order to qualify for tax-exempt status.  If proper application is made to the Internal Revenue Service within 15 months after the not-for-profit organization’s date of formation, the not-for-profit

• rganization will be treated as tax-exempt for federal income tax purposes from

the date of formation. Otherwise, the not-for-profit organization’s exemption will not become effective until the issuance of a determination letter by the IRS.  A tax-exempt not-for-profit organization is exempt from paying federal income

• taxes. Other federal taxes for unemployment insurance programs, social security,

and Medicare must be paid by “tax-exempt” not-for-profit organizations.  Tax-exempt not-for-profit organizations must withhold income taxes from employees’ wages.  Not-for-profit organizations may be subject to state sales and use taxes, state and city business and occupation (B&O) taxes, and state, county and city real and personal property taxes and leasehold excise taxes. Limited exemptions and deductions may apply but not all are automatic based upon federal tax status.  Directors should ensure that the not-for-profit corporation has applied for all applicable tax exemptions at the federal, state and local levels.  If the not-for-profit profit organization regularly carries on an activity that is not substantially related to its tax-exempt purposes, it may be have to pay federal income taxes on this “unrelated business income” (UBI).

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 Directors must ensure that the not-for-profit organization complies with its annual tax reporting and payment obligations (IRS Form 990 and state and local filings). Failure to do so may result in substantial penalties, including criminal penalties (fines and imprisonment) for certain willful violations of tax law. Directors can be held personally liable for certain taxes and penalties.

• II. Organizational Structure

The Internal Revenue Code does not identify any specific organizational structure that an entity must take to qualify for tax-exempt status. However, the choices of legal form are (1) not- for-profit corporation, (2) trust or (3) unincorporated association. Rev. Proc. 822, 1982-1 C.B.

• 367. Those who govern nonprofit corporations are called directors. Although the terms

“director” and “trustee” may be used interchangeably by not-for-profits, the state laws applicable to trusts and trustees are different than those applicable to corporations and directors. Since it most common for a not-for-profit organization to be organized as a corporation, we will be focusing on the state laws governing nonprofit corporations and boards of directors.

• A. Washington Not-for-Profit Laws

Washington has several not-for-profit enabling statutes. Most not-for-profit corporations are organized under the Washington Nonprofit Corporation Act (RCW 24.03). To incorporate, the not-for-profit organization must file articles of incorporation with the Washington Secretary

• f State. The Washington Nonprofit Corporation Act dictates what must be set out in the articles
• f incorporation. See RCW 24.03.025. But note that what is required under Washington law

may not be sufficient to qualify for federal tax-exempt status. Therefore, be careful when drafting articles of incorporation using “model forms,” including the one produced by the Washington Secretary of State, if the organization intends to apply for tax-exempt status under Code section 501(c)(3). The Washington Nonprofit Corporation Act defines a “nonprofit corporation” or a “not for profit corporation” as “a corporation no part of the income of which is distributed to members, directors, or officers.” RCW 24.03.005(3). This definition illustrates the primary difference between “nonprofit” and “not for profit” corporations and for-profit corporations. Not-for-profit corporations may earn profits. The distinction lies in what the corporation is required, by law, to do with its profits. The business of a for-profit corporation is the generation

• f profits for the benefit of its owners, it shareholders, in their private capacity. The business of

the not-for-profit corporation is the generation of profits for the benefit of society and the general

• public. A not-for-profit corporation is prohibited by federal and state law from using its net

earnings to benefit the individuals, which control the not-for-profit corporation, meaning its directors and officers. The Washington Act specifically prohibits not-for-profit corporations from having or issuing shares of stock. RCW 24.03.030(1). The purposes for which a not-for-profit corporation may be organized under the Revised Code of Washington are somewhat broader than those specified in section 501(c)(3) of the Code. Under Washington law, not-for-profit corporations may be organized “for any lawful purpose or purposes, including without being limited to, any one or more of the following purposes:

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charitable; benevolent; eleemosynary; educational; civic; patriotic; political; religious; social; fraternal; literary; cultural; athletic; scientific; agricultural; horticultural; animal husbandry; and professional, commercial, industrial or trade association.” RCW 24.03.015. The purposes of a not-for-profit corporation are stated in its articles of incorporation and are scrutinized by the IRS.

• B. Summary of “Not-for-Profit” Basics

 A “not-for-profit corporation” is defined under Washington state law as a corporation no part of the income of which is distributed to its members, directors

• r officers.

 The Internal Revenue Code also prohibits “private benefit” (defined as allowing more than an insubstantial accrual of private benefit to individuals or

• rganizations) and “private inurement” (defined as the inurement of any part of

the organization’s net earnings to the benefit of an “insider,” one who has a personal or private interest in the activities of the organizations, such as an

• fficer, director or key employee). Organizations running afoul of these rules can

jeopardize their tax-exempt status. III. Role of the Board of Directors Under Washington law, the body charged with the governance of a not-for-profit corporation is the board of directors. Directors do not have to be residents of Washington unless the articles of incorporation or bylaws so require. RCW 24.03.095. The articles of incorporation

• r bylaws may prescribe other qualifications for directors. Id.

The number, term and manner of election of directors are provided for in the

• rganization’s articles of incorporation or bylaws. RCW 24.03.100. No one director has

authority to act alone on behalf of the corporation (although RCW 24.03.100 does permit a not- for-profit corporation to have a board of one). The Board of Directors governs as a whole. The Board of Directors also is the sole body responsible for the governance of the organization. The articles of incorporation or bylaws may designate other honorary titles or “boards” – such as Advisory Boards, honorary directors, emeritus directors – however, these other classes of individuals do not participate in the governance of the not-for-profit corporation. These titles are honorary and do not grant any authority (or impose any legal duties) upon the honorees. What Defines the Duties of a Director?  Federal and state law.  Articles of incorporation.  Bylaws.  Policies and procedures.  Resolutions of the Board of Directors.  Contracts with third parties (such as donor agreements).

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The not-for-profit corporation’s articles of incorporation usually will grant broad authority to the board of directors. However, this general authority is often narrowed or explained in greater detail in the not-for-profit corporation’s bylaws. The bylaws contain the rules by which the not-for-profit corporation is governed and operated. The not-for-profit corporation’s directors have the authority to adopt, alter, amend, and repeal bylaws. RCW 24.03.070. Most not-for-profit corporations also have written operating policies and procedures that cover topics such as personnel, fund raising, financial management, and expense

• reimbursement. Finally, a board of directors may adopt written resolutions to approve one-time

contracts, hire investment advisors, or grant check-writing authority. The Washington Nonprofit Corporation Act also requires a not-for-profit corporation to have officers including, at a minimum, a president, one or more vice presidents, a secretary and a

• treasurer. RCW 24.03.125. The Board of Directors elects or appoints the officers annually

unless a different procedure for election or appointment is set forth in the articles of incorporation or bylaws. Id. If the articles of incorporation or bylaws so provide, then any two

• r more offices may be held by the same individual except for the offices of president and

secretary and all of the officers are ex officio members of the Board of Directors. Id.

• A. Duty to Manage the Corporate Affairs

The Washington Nonprofit Corporation Act contains specific provisions dealing with the duties of not-for-profit directors. The most basic duty is to manage the affairs of the not-for- profit corporation (RCW 24.03.095). What Does This Mean?  Determine the not-for-profit corporation’s mission, purposes and goals.  Select the executive director, define his or her duties, set his or her compensation and bonuses, review his or her performance on a regular basis, and terminate the executive director, if necessary.  Adopt operational policies and procedures and ensure effective organizational planning by the staff.  Ensure adequate financial resources.  Manage and monitor resources effectively, approve budgets, and establish fiscal policies and financial controls.  Determine, monitor, and strengthen programs and services.  Serve as public representatives of the not-for-profit corporation and enhance its public standing.  Recruit and train new directors and regularly assess performance of the board.  Maintain the not-for-profit corporation’s good standing with the IRS and the  Washington Secretary of State.  Ensure legal and ethical integrity and maintain accountability. Unless the not-for-profit corporation has members with voting rights, there is no legal requirement that any formal meetings be held. However, it is recommended that the Board of Directors hold at least an annual meeting in order to fulfill its basic duty under RCW 25.03.095.

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Most not-for-profit boards have a regular schedule of meetings conducted throughout the

• year. Regular meetings may be held with or without notice, as specified in the bylaws. RCW

24.03.120. Unless restricted by the articles of incorporation or bylaws, meeting may be held by conference call so long as all persons participating in the meeting can hear each other at the same

• time. Id. “Online meetings” are not allowed, although if certain requirements are met, notice of

meetings can be sent via electronic transmission, such as e-mail. See RCW 24.03.009. In Washington, directors may take action either in person at a meeting (which may be held via conference call) or via written consent. See 24.03.465 However, like with electronic notice, certain procedures must be followed in order for an action by written consent to be valid:  Consent to the action must be in the form of a “record,” meaning information inscribed on a tangible medium or contained in an electronic transmission. RCW 24.03.005(18). "Tangible medium" means a writing, copy of a writing, facsimile,

• r a physical reproduction, each on paper or on other tangible material. RCW

24.03.005(19). “Electronic transmission” means “an electronic communication (a) not directly involving the physical transfer of a record in a tangible medium and (b) that may be retained, retrieved, and reviewed by the sender and the recipient thereof, and that may be directly reproduced in a tangible medium by a sender and recipient.” RCW 24.03.005(12).  The consent must set forth the action so taken and must be executed by all of the

• directors. An electronic transmission is “executed” by being electronically

transmitted along with sufficient information to determine the sender's identity, with respect to an electronic transmission. RCW 24.03.005(14). A consent in such form, whether following the form of a traditional written consent in lieu of a meeting or an electronic transmission, has the same force and effect as a unanimous vote taken in person at a meeting. If notice of a meeting required to be given is not given or is improperly given, then the meeting is not properly called and no business may properly be transacted at the meeting. However, attendance of a director at a meeting constitutes a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction

• f any business because the meeting is not lawfully called or convened. RCW 24.03.120.

To legally conduct business at a meeting, a quorum of directors must be present. Unless the articles of incorporation or bylaws provide otherwise, a majority of the directors constitutes a

• quorum. RCW 24.03.110. In Washington, a quorum cannot be less than one-third of the
• directors. Id.

If a quorum is present, then the act of a majority of the directors present at the meeting shall constitute the legal act of the board unless the Washington Nonprofit Corporation Act, the articles of incorporation or bylaws require more than a majority. Id. Washington law does not permit directors to vote by proxy. See RCW 24.03.110 (providing that the “act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of

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directors” unless the articles of incorporation, the bylaws or statute requires the consensus of a greater number of directors). At a meeting, a director may vote in favor of an act, against an act (by dissenting) or not vote at all (by abstaining). However, a director who is present at a meeting of the board of directors will be presumed to have assented to any action taken at the meeting. RCW 24.03.113. If the director does not approve of the action, then he or she must make certain that his or her dissent or abstention is noted in the minutes of the meeting. Id. In the alternative, the director may file a written dissent or abstention with the secretary during the meeting or immediately

• thereafter. Id.

In certain circumstances, it may be appropriate for directors to delegate duties to committees, non-director officers, employees or agents of the nonprofit corporation. However, in all circumstances, the directors will remain ultimately responsible (and liable) for the affairs of the not-for-profit corporation. If the articles of incorporation or bylaws provide, the board of directors may designate and appoint committees to have and exercise the authority of the board in the management of the affairs of the not-for-profit corporation. RCW 24.03.115. However, at least two directors must serve on the committee and the delegation will not relieve the board of directors, or any individual director, of any responsibility imposed upon the board or the individual director by law. Id. Committees may not do any of the following:  Amend, alter or repeal the bylaws. Elect, appoint, or remove any member of such committee or any director or officer. Amend the articles of incorporation.  Adopt a plan of merger or consolidation with another corporation.  Authorize the sale, lease, or exchange of all or substantially all of the property and assets of the corporation not in the ordinary course of business.  Authorize the voluntary dissolution of the corporation.  Revoke proceedings for the voluntary dissolution of the corporation.  Adopt a plan for the distribution of the assets of the corporation.  Amend, alter or repeal any resolution of the board of directors, which by its terms provides that it shall not be amended, altered, or repealed by such committee. Committee authority may be limited further by resolution of the board of directors. A not-for-profit corporation may file suit against directors for exceeding their stated

• authority. RCW 24.03.040(2). Individual directors also have the right to file suit against a not-

for-profit corporation to enjoin the corporation from doing or continuing unauthorized acts. RCW 24.03.040(1).

• B. Standard of Conduct – Duties of Loyalty, Due Care and Obedience

Washington law sets forth the duties of directors of not-for-profit corporations. These are the duties of loyalty, due care and obedience. A director must perform his or her duties, including his or her duties as a member of any board committee on which he or she serves, in

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good faith, in a manner which he or she believes to be in the best interests of the not-for-profit corporation, and with the care, including reasonable inquiry, of an ordinarily prudent person acting in a like position under similar circumstances. RCW 24.03.127.

• 1. Duty of Loyalty

Directors owe a duty of loyalty to the not-for-profit corporation, which means that they always must act for the benefit of the not-for-profit corporation. They may not act for their own personal benefit or interests (including the interests of family members or associated businesses). If a director is serving on the board of directors of the not-for-profit corporation as a representative of another organization, he or she must remember that the duty of loyalty which he or she owes to the not-for-profit corporation may involve decisions which may not always be in the best interests of the organization which he or she represents. Under Washington law, the duty of loyalty has three key components:  Directors must avoid conflicts of interest.  Directors must not to usurp corporate opportunities.  Directors must maintain the confidentiality of private corporate affairs. Arneman

• v. Arneman, 43 Wn.2d 787, 264 P.2d 256 (1954).

If a director or his or her family may benefit, directly or indirectly, financially or

• therwise, from the director’s position on the board, a conflict of interest exists. A director may

not vote on a matter in which he or she has a conflict of interest. Nord v. Eastside Association, 34 Wn. App. 796, 664 P.2d 4 (1983). Prior to the board’s discussion or consideration of such a matter, the affected director should fully disclose his or her interest and then remove himself or herself from the discussion and vote. Any disclosures should be made in writing and should be recorded in the minutes of the meeting. The director’s abstention also should be recorded in the

• minutes. Even if there exists a conflict of interest, the board of directors may make a decision

that is favorable to the interested director if the decision is in the best interests of the not-for- profit corporation. Washington law expressly prohibits a corporation from making loans to its directors or

• fficers. RCW 24.03 .140. Any director who votes for or assents to the making of a loan to a

director shall be jointly and severally liable to the corporation for the amount of such loan and the repayment thereof. Id. Having a written conflict of interest policy in place helps ensure an understanding of what limitations apply and what procedures should be followed in the event a conflict of interest does exist. There are several sample policies available online – at www.irs.gov in Appendix A to the instructions published for IRS Form 1023 and also at www.waaco.org, the website of Washington Attorneys Assisting Community Organizations. Washington law also prohibits directors from taking personal advantage of opportunities that otherwise would benefit the not-for-profit corporation. A director may not fail to disclose a business opportunity in order to take personal advantage of it.

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Finally, Washington law requires directors to maintain the confidentiality of private corporate affairs. Information exchanged and discussed at board meetings is confidential and should not be discussed with outside third parties. It is advised to put a confidentiality policy in writing to ensure that there is no confusion about what may or may not be discussed outside of the boardroom.

• 2. Duty of Due Care

The duty of due care relates to the level of competence expected of directors. A director must act not only in good faith but also “with such care, including reasonable inquiry, as an

• rdinarily prudent person in a like position would use under similar circumstances.” RCW

24.03.127. What Does It Mean?  The complexity or magnitude of the problem or decision may affect the determination of whether or not the director acted as an ordinarily prudent person.  Directors should attend board meetings regularly, read minutes of meetings and reports presented by officers, agents and employees, exercise independent judgment when voting, ask questions, participate in discussions and decision- making, and remain informed about the not-for-profit corporation’s affairs, programs and activities.  Directors must require that financial reports and budgets be produced. They must review financial information and evaluate the appropriateness of expenditures, including salaries and other forms of compensation.  Directors need not exercise greater skill or expertise than an ordinary person. However, they are required to know when expertise is required and then obtain it.  Directors who are professionals may be held to a higher duty if they offer

• pinions in their professional capacities.

 Directors are allowed to take risks and make mistakes.  The duty of due care is an active duty. Directors cannot avoid liability by claiming ignorance of corporate affairs. Ignorance is not bliss. In fulfilling his or her duties, a director is permitted by law to rely on information,

• pinions, reports, or statements (including financial statements and other financial data) prepared

and presented by (a) officers and employees of the not-for-profit corporation whom the director believes to be reliable and competent; (b) counsel, public accountants, or other persons as to matters which the director believes to be within such individuals’ professional or expert competence; or (c) a committee of the board, acting within its designated authority, which the

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director believes merits confidence. RCW 24.03.127. However, reliance on such information does not excuse the director from exercising reasonable inquiry and acting as a prudent person. What Does This Mean?  Directors must study and understand issues and consider information, opinions, reports and statements prepared and presented by appropriate professionals or authorities and then create records that reflect these activities.  Directors may not rely on the opinions of other directors who are not recognized as authorities or experts on issues brought up for board consideration.

• 3. Duty of Obedience

Directors also owe a duty of obedience to the not-for-profit corporation. This duty requires directors to act in a lawful manner and in accordance with the mission of the not-for- profit corporation as stated in the organizational documents. Directors may exercise judgment in determining how the not-for-profit corporation should carry out its mission. However, they must remain consistent with the stated purposes of the organization or risk losing the trust of donors

• r, in extreme cases, the organization’s tax-exempt status.
• C. Third Party Liability and Limitations

The not-for-profit corporation, its directors, its officers, its members, if any, or the state attorney general may enforce the duties of loyalty, due care and obedience. These duties are not enforceable by outside third parties. Directors generally are immune from personal liability to third parties. Because a not- for-profit corporation is an entity legally separate from its officers and directors, as long as the

• fficers and directors follow corporate formalities, do not mix personal and corporate business

and do not assume personal liability for corporate debts or obligations, then most obligations and liabilities will have to be satisfied out of the assets of the corporation and not the pockets of

• fficers and directors. In other words, the officers and directors will be shielded from personal

liability by the corporate form. Under Washington law, directors are immune from liability to third parties for discretionary acts (or failures to act) unless the decision to act (or failure to decide) constitutes gross negligence. RCW 4.24.264(1). Most directors of 50l(c)(3) organizations also are covered by the federal Volunteer Protection Act of 1997. What Is Covered by the Volunteer Protection Act?  Any individual performing services for a not-for-profit organization who does not receive compensation or anything of value in excess of $500 per year (a “volunteer”).

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 Acts (or failures to act) of a volunteer taken on behalf of the not-for-profit

• rganization.

 Acts (or failures to act) within the scope of volunteer responsibilities.  Properly licensed, certified or authorized volunteers (when required by law).  Harms not caused by willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of individuals harmed by the volunteer.  Harms not caused by the volunteer operating a motor vehicle, vessel or aircraft. The Act does not affect the potential liability of the not-for-profit corporation for the harm to a third party nor does it protect a volunteer from being sued by the not-for-profit

• corporation. The Act also does not prevent individual officers or directors from being named as

defendants in a lawsuit.

• 1. Corporate Limitation of Director Liability

A not-for- profit corporation may limit the personal liability of its directors to the corporation itself. However, the limitation on liability must be clearly spelled out in the not-for- profit corporation’s articles of incorporation. RCW 24.03.025(4)(c). In Washington, a not-for- profit corporation can only limit director liability for monetary damages (not equitable remedies) and cannot limit liability for intentional misconduct or knowing violations of the law. Id. Furthermore, the not-for-profit corporation cannot limit liability with respect to any transaction that personally benefits a director (in money, property, or services to which the director is not entitled). Id. As previously mentioned, neither federal nor state law protects directors from being named as defendants in a lawsuit. To protect their directors from financial harm resulting from civil lawsuits, most nonprofit organizations purchase directors’ and officers’ (D&O) liability

• insurance. A D&O policy generally will reimburse the not-for-profit corporation for

indemnification payments made to a director or will make direct payments to directors when the directors are not reimbursed by the not-for-profit corporation. D&O policies usually do not cover intentional or deliberate acts of wrongdoing committed by directors and may not cover fines, penalties, or punitive damages, thus it is important to review a particular policy’s definition of “loss.”

• 2. Indemnification

Under certain circumstances, Washington law provides for corporate indemnification of a director who is named as a party to a proceeding because he or she is or was a director. The Washington law relating to the indemnification of directors of not-for-profit corporations is the same as that for directors of for-profit corporations. Indemnification is the payment of legal

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costs, including judgments, settlements and attorneys’ fees, by the corporation on behalf of individual officers or directors. Unless specifically precluded by the articles of incorporation, a not-for-profit corporation is required by law to indemnify any director for reasonable expenses incurred in defending any proceeding to which the director is named as party if the director “wholly successful, on the merits or otherwise” in defending himself or herself. RCW 23.B.08.520. This type of indemnification is referred to as “mandatory indemnification.” In certain other cases, the board of directors may authorize indemnification not mandated by statute. Board-authorized indemnification is permitted if a director has acted in good faith and in the best interests of the corporation. RCW 23B.08.510. In such a case, the corporation must make an official determination that the director meets the standard of conduct and must evaluate reasonableness of expenses. Id. Board-authorized indemnification, however, is expressly prohibited (a) if a court holds the director liable to the not-for-profit corporation; (b) if the director received an improper benefit from the not-for-profit corporation; or (c) for criminal acts unless the director has no reasonable cause to believe his or her conduct was unlawful. Id. Finally, the court may in some circumstances award indemnification. Unless specifically precluded by the articles of incorporation or bylaws, a director may petition a court for indemnification or advancement of expenses. RCW 23B.08.540. Indemnification of reasonable expenses may even be awarded by the court in cases where the director is adjudged liable to the not-for-profit corporation. Id.

• IV. Conclusion

Now that you have joined a Board of Directors of a 501(c)(3) not-for-profit corporation, you may be more concerned about knowing what you are required to do than about your potential personal liability for what you may fail to do or may do wrong. Generally speaking, the personal liability risk is fairly minimal, and the risk is further minimized by your fulfilling the basic statutory duties owed by all directors to the not-for-profit corporation. So in summary:  Properly discharge your duties of due care, loyalty and obedience. Exercise reasonable care and prudence.  Ensure that the directors and officers abide by corporate formalities – set agenda for meetings, do not act without a quorum, take minutes of meetings, abide by the

• rganization’s articles of incorporation and bylaws as well as written policies and

procedures.  When disagreeing with an action take by the board, make certain that your dissent

• r abstention is made in writing and is made part of the minutes of the meeting by

the secretary.  Adopt a conflicts of interest policy and abide by its terms.

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 Ensure that organizational staff is meeting all local, state and federal reporting

• deadlines. Of particular importance is the annual filing with the Washington

Secretary of State Corporations Division, which maintains the organization’s corporate form and the corresponding “corporate shield” from liability.  Purchase additional insurance. Some homeowners’ insurance policies include coverage for particular liabilities that may be incurred by an individual serving as a volunteer director. Other available specialty policies include general liability, employees’ liability, malpractice, automobile, and fiduciary.  Ensure that the not-for-profit corporation has sufficient general liability insurance coverage and also provides D&O insurance. Read and understand policy coverage and limitations. From time to time, conduct an organizational risk assessment to ensure that coverage is adequate for current activities and programs.  Review articles of incorporation for provisions limiting liability to not-for-profit corporation or its members and for provisions precluding mandatory or court-

• rdered indemnification.

 Review bylaws for indemnification provisions. Remember that corporate indemnification is only as good as the organization’s cash flow.  Review IRS Publication 4221-PC (Compliance Guide for 501(c)(3) Public Charities), which is available online at www.irs.gov, to understand your

• rganization’s federal compliance obligations.

 Conduct an organizational assessment using the Nonprofit Legal Self-Assessment Checklist produced by Washington Attorneys Assisting Community Organizations (WAACO), which is available online at www.waaco.org. This guide can help your Board understand a broad array of common legal obligations and assess how well your organization is meeting those obligations. Organizations needing pro bono legal assistance in some of the areas discussed herein may qualify for such assistance through WAACO. Remember that the duties of directors are proactive and seeking assistance early on is the best defense in times of legal, financial or public relations crises. Now, go have fun!