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Liability risk management needed no matter the type of operation

| Aug 5, 2015 | Business Formation & Planning |

There is no denying that small businesses are the lifeblood of the economy. That’s true in North Carolina as much as in any other state. But not all businesses are necessarily for profit.

Indeed, some operations launch with the express purpose of filling a need or service because the profit potential hasn’t attracted entrepreneurs to do it. The way this often gets done is through formation of a nonprofit organization. And according to the North Carolina Center for Nonprofits, this sector is responsible for 11 percent of all employment in the state.

Regardless of whether your operation is going to be run as a for-profit enterprise or as a charitable nonprofit, there are laws that govern its functioning. And to be sure legal compliance obligations are met, it’s best to work with an attorney who knows the nuances that may come into play.

One of the most critical issues that any organization may face deals with liability. This is a particular area of concern for nonprofits because of the nature of their clientele and the fact that funding is usually by donations. If there are suspicions of wrongdoing, the organization and its leaders may be on the receiving end of any number of legal actions.

North Carolina law requires that every nonprofit have a board of directors to make accountability clear. That board might only have one person on it, but the NCCN observes that the best practice is to have at least 5. The duties and potential liabilities are many. So board members need to be educated and legal protections need to be in place.

The issues that a board member might be held legally liable can be divided into one of three categories.

  • If corporate or fiduciary duties are breached, a board member or other key stakeholder in the nonprofit corporation could sue.
  • If a board member participates in a decision that harms someone or creates a dangerous policy that results in injury, a claim of corporate harm could be brought.
  • All pertinent laws, such as environmental, tax or antitrust rules, need to be compliance and failure to do so could lead to liability for statutory violations.

In our next business post, we’ll look more deeply into what constitutes proper fiduciary duty.

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