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What’s the nature of a nonprofit board’s fiduciary duty?

| Aug 12, 2015 | Business Contracts & Disputes |

In our previous business-focused post, we observed that attention to the details of legal compliance is important regardless of whether your endeavor is a for-profit one or not-for-profit. There are rules and regulations that need to be addressed and the steps involved can be so complicated that it can be easy to overlook critical points.

As we promised in that post, we take a look today at one of the key areas for which leaders of a nonprofit could be held liable — the proper exercise of fiduciary duty. What is it, and what are the implications to avoid an allegation of breach of fiduciary duty?

Members of nonprofit corporation boards have generally three duties under the fiduciary category.

  • Duty of care: North Carolina law expects certain things of board members. Attending board meetings is considered crucial. Failing to do that could be construed as indifference and open the door to a breach claim. Members are also expected to be well informed and to seek information when necessary so they can adequately fulfill their oversight responsibilities. Each member also has a responsibility to remain objective and avoid groupthink.
  • Duty of loyalty: The focus of your loyalty is expected to be on the welfare of the nonprofit, not your own. If the organization enters into a contract in which you may have an interest, caution and care is required to be sure that the nonprofit’s interests come first. Any potential conflicts of interest need to be disclosed and if you aren’t sure if one exists, consulting an attorney is advisable.
  • Duty of obedience: This one may sound onerous to some. What it means is simply that you act in ways that are consistent with the organization’s reason or being. This is usually stated its articles of incorporation and bylaws. It might also involve ensuring that specific gifts or bequests are used in accordance with terms that might be attached to them.

There may be other laws with implications for a nonprofit organization and it’s clear that it is wise to check with an experienced attorney to avoid running afoul of them.

Source: N.C. Center for Nonprofits, “How to Start a 501(c)(3) Nonprofit Organization,” accessed Aug. 12, 2015

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