Nonprofit board duties, explained

A nonprofit corporation has no owners. The board of directors is the group the law holds responsible for making sure the organization's money and property are used for its mission. That responsibility is real even when every director is an unpaid volunteer and the organization has a budget of a few thousand dollars.

This guide covers what directors owe the organization, how big and how independent a board should be, what the IRS asks about governance each year, and how to keep the board's job separate from the staff's.

Where board duties come from

State law, not the IRS. Your nonprofit is a corporation formed under the law of one state (see articles of incorporation). That state's nonprofit corporation statute, its court decisions and its attorney general set the standards for directors. The IRS cares about governance because weak oversight leads to tax problems, but it does not define fiduciary duties.

A fiduciary is a person in a position of trust who must act for someone else's benefit. Directors are fiduciaries of the corporation. State attorneys general commonly describe three duties. The Minnesota Attorney General's guide for board members, for example, lists the duties of care, loyalty and obedience to the law. Other states use similar words but differ on details, such as who can sue a director or how conflicts must be approved.

Duty of care

The duty of care asks you to act in good faith, in a way you reasonably believe is in the organization's best interest, and with the care an ordinarily prudent person would use in a similar position. In practice:

• Attend meetings and read the materials before you arrive.
• Review financial statements and ask questions until you understand them.
• Make sure there are basic internal controls, such as two people involved in approving and paying bills.
• Follow up on warning signs, such as a missed payroll tax deposit or a complaint about misuse of funds.

You can rely on reports from officers, committees and outside professionals, but you still have to oversee them.

Duty of loyalty

The duty of loyalty means you put the organization's interests ahead of your own. You do not use your position, or the organization's property, for personal gain or to benefit your family or your business. When a decision could benefit you, you disclose it and step back from the vote. A written conflict of interest policy turns this duty into a routine.

Loyalty is also where federal tax law adds teeth. Paying an insider more than fair value can be an excess benefit transaction with excise taxes on the insider and on the managers who approved it. See private benefit and excess benefit.

Duty of obedience

The duty of obedience means following the organization's governing documents, staying within its stated mission, and complying with the law. That includes filing the annual IRS return, keeping state registrations current and spending restricted gifts as the donor directed. Minnesota's guide notes that directors also have a duty to keep the corporation in good standing with the secretary of state.

Board size and independence

Federal law sets no minimum. The IRS does not require a particular number of directors. Some states do. New York's Not-for-Profit Corporation Law section 702 says the board must have at least three directors. Check your state's statute before you write the number into your bylaws.

More than the minimum is often wiser. A board of three can work for a very small organization, but it leaves little room for a director to step out of a vote when there is a conflict. A board of five to nine directors is easier to run well: it can still act when one or two people are unavailable or have to step out of a vote.

Independence matters to the IRS. Publication 4221-PC says the board should include independent members and should not be dominated by employees or by people who are not independent because of business or family relationships. On Form 990, a voting member counts as "independent" only if, for the whole tax year:

1. They were not paid as an officer or employee of the organization or a related organization.
2. They did not receive more than $10,000 as an independent contractor (other than reasonable pay for serving as a director).
3. Neither they nor a family member had a transaction with the organization that must be reported on Schedule L.
4. Neither they nor a family member had a similar reportable transaction with a related organization.

Being a donor, even a large one, does not by itself make a director non-independent.

What Form 990 asks about governance

Organizations that file the full Form 990 answer Part VI, "Governance, Management, and Disclosure." (Organizations that file Form 990-EZ or 990-N do not complete Part VI; see annual filing requirements for which return applies.) Section B of Part VI says it asks about policies that the Internal Revenue Code does not require. You can answer "No" without breaking a rule, but the answers are public, and donors, grantmakers and state regulators read them.

A board that holds documented meetings, adopts the three common policies and reviews the return before it is filed can answer most of these questions with a plain "Yes." For a walk-through of the full return, see Form 990, explained on our sister site.

Officers and what they do

Officers are the people the board appoints to carry out specific roles. Your bylaws name them and describe their duties. The usual set is:

• President or chair: runs board meetings and often acts as the organization's main signer. Some organizations split this into a board chair and a separately titled chief executive.
• Secretary: keeps minutes, notices of meetings and the corporate records. See nonprofit recordkeeping.
• Treasurer: oversees finances, presents financial reports to the board and makes sure tax filings happen.

State law may limit how offices are combined. New York, for example, allows one person to hold two or more offices but not both president and secretary. New York also bars an employee from serving as board chair unless two-thirds of the entire board approves and the basis is documented in writing.

Board versus staff

The board governs; the staff manages. The board adopts the budget, sets policy, hires and evaluates the executive director, approves major contracts and checks results. The executive director and staff run programs, hire other staff, and make daily decisions within the budget and policies.

Founders who stay on the board need extra care here. A founder who is also the paid executive director reports to a board on which they also vote. That arrangement is common and is permitted in many states (New York, for example, lets the bylaws make officers ex-officio board members), but it weakens oversight unless the other directors are genuinely independent and the founder steps out of decisions about their own pay. See paying founders and staff.

When one person holds all the knowledge

A common pattern in young nonprofits is that the founder knows the donors, the bank login, the program details and the history, and the board defers on everything. It usually comes from good intentions, but it creates real risk: no one else can step in during an illness, and no one is positioned to question a decision. A few habits help:

• Put bank accounts, the domain name, and online accounts in the organization's name, with at least two people holding access.
• Have the treasurer, not the executive director, present the financial report.
• Hold a short closed session of independent directors at least once a year to review the executive director's performance.
• Write down key procedures so they survive a change in leadership.

501Nonprofit.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.