Important Legal Considerations

The following are some of the important legal issues that members of a non-profit board should be aware:

1. Duty of Care. Acting in a reasonable and informed manner. How can a director satisfy the requirements of duty?

  • Keep informed and make reasonable inquiries.
  • Attend board meetings regularly.
  • Have adequate information before making decisions.
  • Review material in connection with board meetings.
  • Become familiar with the organization (e.g. structure, legal documents, etc.)
  • Become familiar with the applicable non-profit law.
  • Exercise independent judgment when making board decisions.

Reliance. In discharging their duties, directors may rely on information and opinions provided by the following resources:

  • Legal counsel.
  • Financial experts.
  • Other competent experts.
  • Committees.

Delegation. While directors may delegate management duties, they shall not delegate oversight and governance responsibilities.

2. Duty of Loyalty. Acting in a manner believed to be in the best interest of the association. How can a director satisfy the requirements of this duty?

  • Avoid conflicts of interest and disclose when they exist.
  • Avoid self-dealing transactions and disclose when they exist.
  • Avoid corporate opportunities and disclose when they exist.
  • Maintain corporate confidences.

3. Other Critical Legal Issues.

  • No private inurement – no part of an association’s earnings may inure to the benefit of any private individual (e.g., paying unreasonable compensation to an insider).
  • No excess benefit transactions – a director who knowingly approves such a transaction can subject the organization and director to federal excise taxes.

4. Business Judgment Rule. A director is not liable for any action taken or any failure to take any action, if the director’s duties were performed in compliance with this section.

Compiled by Former NSA Board of Director Francine Ward – Edited 2012