Being asked to serve as a director of a nonprofit entity can be a very flattering invitation. It can represent an opportunity to provide service to your community, as well as to achieve some level of personal visibility as a director. Nevertheless, such positions do not come without certain risks. Every director of a nonprofit entity has fiduciary duties towards the organization. In substance, this means paying attention to the activities of the organization and reviewing paperwork provided by the nonprofit management. In addition, it means going to meetings and asking what may be tough questions.
Both state and federal authorities have an interest in ensuring that nonprofit entities are properly run and operated in accordance with the nonprofit’s charters. Nonprofit entities which are granted tax-exempt status under Internal Revenue Code Section 501(c)(3) enjoy a favored status because contributions toward these organizations are qualified as deductions from personal income. However, the corollary is that the Internal Revenue Service takes a particular interest in ensuring that the nonprofit entity is doing what it represented it would be doing to receive that tax-exempt status. If it is not, it is possible that one or more directors or officer might find themselves responsible for responding to Internal Revenue Service questions.
In addition, directors have the responsibility of asking questions and looking over the operations of the entity. A nonprofit entity should have a conflict of interest policy under which any director which does business with the entity is required to fully disclose the existence of a relationship as well as the extent to which it receives remuneration. While it is not forbidden that a director be compensated for the director’s services, it should be very clear that such remuneration does not cause financial stress on the organization. This may involve the relationship between the size of the organization as well as the remuneration or expenses for which a director is reimbursed.
In short, if you are asked to serve on a nonprofit entity board, do so with your eyes wide open.