Occasionally, individuals may hesitate to serve on the board of a nonprofit because they are afraid that they may incur liability based on decisions they make as directors.

However, Virginia promotes nonprofit board service by providing substantial liability protection to nonprofit directors, especially to directors who serve in a volunteer capacity.

Under Va. Code § 13.1-870, a director is not liable for any decision made with “good faith business judgment.” This standard protects all decisions except those that are fraudulent, a breach of trust, gross mismanagement, or made in bad faith. Therefore, if a director acts diligently and in good faith to make the best decision for the nonprofit, the director will not be personally liable for any results.

Furthermore, the statute states that directors are entitled to rely on information, opinions, reports, and statements that are prepared or presented by:

• Officers or employees who are reliable and competent in the matters presented
• Legal counsel, public accountants, or others as to matters within the person’s professional or expert competence
• Committees of the board of directors so long as the director relying on the information is not a member of the committee

A director will be credited with acting diligently if he or she relies on information provided by an individual in one of the preceding groups. Such reliance will often also equate to making a decision with good faith business judgment. In sum, a director is protected from liability if he or she, in good faith, makes a reasonably informed decision in the best interest of the nonprofit.

Directors also owe a duty of loyalty to the nonprofit and must guard against conflicts of interest. All nonprofits should have a policy that governs reporting and dealing with conflicts of interest. Adhering to this policy will generally prevent directors from breaching the duty of loyalty.

Va. Code § 13.1-870.1 provides even more protection to directors of nonprofits that are exempt from federal income tax under § 501(c). Under the Virginia statute, if a director serves in a volunteer capacity (and is therefore not compensated), the director will not incur any liability as a result of decisions made on behalf of the nonprofit. This protection continues even if the nonprofit is terminated or otherwise discontinued. The liability of nonprofit directors who receive compensation is limited to the amount of their salary. However, this limited liability protection does not extend to a director who engages in willful misconduct or who knowingly violates criminal law. Both conditions require that a director act intentionally and in an egregious manner.

Additionally, under ordinary corporate principles, directors of nonprofits are usually not personally liable for torts committed by the nonprofit or contracts entered into by the nonprofit. Therefore, individuals should not decline board service because they are afraid of legal liability. Directors, especially those who serve as volunteers, receive generous protections so long as they do not act in an intentionally wrongful or grossly negligent manner.

Get Peace of Mind

If you are concerned about potential liability or have other nonprofit concerns, contact Davis Law Group and set up an appointment to talk to our nonprofit attorney today.