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In this comprehensive guide, we'll dive deep into the structure, duties, and legal obligations of nonprofit boards. You'll learn about key positions, the importance of directors' and officers liability insurance, and how the board works to advance the organization's mission.
Whether you're a current board member or considering joining one, this article will provide you with a clear understanding of what it takes to be an effective nonprofit board member.
What is a Nonprofit Board of Directors?
A nonprofit board refers to the team of directors that form the governing body of a nonprofit organization. They are the fiduciaries responsible for making key decisions that advance the organization's mission and goals.
They're primarily focused on developing high-level strategies and ensuring the nonprofit has adequate funds and resources to move forward.
The nonprofit board steers the organization toward the path of a sustainable and stable future by adopting ethical, legal, and beneficial policies.
While a nonprofit board members team typically ranges from three to 50, depending on the nonprofit's size, certain positions are given to individual board members.
Here are three common and critical nonprofit board positions. Generally, these are the prominent members of nonprofit boards.
Assisting in planning and maintaining the board’s agenda throughout the year.
Managing records of nonprofit boards.
Assists in board member orientation.
Treasurer
The treasurer is the financial head of the nonprofit overseeing its financial condition.
Assists in setting financial policies that govern a nonprofit entity.
Informs about the nonprofit financial position.
Takes the lead in the annual audit and addresses questions about the same in front of the boards.
Monitors and guides the finance committee.
However, the team can be bigger with more employees, often called at-large board members, depending on the nonprofit's size. They may not have specific responsibilities and roles but will be an important part of the board. They are usually expected to attend all board meetings, take part in board activities, and serve on at least one committee.
What Are the Board Member Duties for Nonprofit?
1. Legal Responsibilities
The board of directors is the legal governing body responsible for ensuring the nonprofit's operations are carried out according to the applicable federal and state laws. This means they need to be aware of all the legal requirements that apply to a nonprofit and oversee that those are met.
Failing to file the IRS Form 990 on time can have severe consequences for a nonprofit. It may face immediate penalties and fines and even lose its tax-exempt status. The nonprofit will be unable to accept tax-deductible donations until the situation is rectified.
Beyond tax liability, board members must understand the penalties associated with overpaying individuals at the organization, engaging in political lobbying, and other such activities.
The board also needs to be aware of other regulations at a local level regarding fundraising activities
Disregarding any of the laws results in hefty legal expenses and affects the nonprofit's reputation, which the board has strived hard to build.
2. Provide Adequate Resources and Funds
The nonprofit board member's responsibilities include arranging necessary resources and essential funds for the nonprofit. Whether donating their own money or using their connections to raise the amount, a critical role of the nonprofit board is meeting the organization's targets. They must be committed to the fundraising goals of a nonprofit, effectively monitoring and guiding initiatives.
Nonprofit boards must also attend public fundraising events and auctions/events their organization hosts.
3. Overseeing the Executive Director's Performance
The nonprofit board of directors is also responsible for hiring and overseeing the activities of the nonprofit's executive director or CEO.
The board executes the selection process, sets the compensation of CEOs, and evaluates their performance. It even offers guidance and support to them to ensure that the organization functions effectively.
Board directors also participate in management decisions to further the organization's growth.
4. Recruit and Orient New Board Members
The duties of a nonprofit board of directors also encompass bringing in newly qualified members to support them in extending their mission impact.
To do that, they need to keep an eye on potential nonprofit or network members who would bring additional insight, skills, and experience to the table.
What is Nonprofit Directors and Officers Liability Insurance?
Working toward the nonprofit's benefit and enhancing its mission can sometimes face obstacles, resulting in lawsuits. These lawsuits can affect members' assets and reputations, negatively impacting the organization.
Directors and officers liability insurance protects individuals serving as an organization's directors, board members, and officers if legal action is taken against them, particularly if they are sued by the organization's employees, customers, and other parties. It can also cover legal fees and other costs an organization may pay due to such a suit.
This insurance coverage takes into account former, current, and future directors.
The insurance policy indemnifies them from legal fees, settlements, and financial losses that result from being held responsible in legal action.
Directors and Officers Liability Insurance Coverage Table
Coverage
What is Covered
What is Not Covered
Directors and Officers Liability Insurance
Protection of personal assets belonging to the nonprofit’s directors, officers, and members
Covers the cost of settlements, investigations, and judgments involving: - Breach of fiduciary duty - Acts or omissions - Alleged or actual errors - Failure to comply with workplace laws - Misleading or false statements
General liability claims for bodily injury or property damage
Misconduct done before the coverage begins
Fraudulent or criminal misconduct
Actions taken for personal gains such as illegally acquired funds
Best Practices for Nonprofit Board Governance
Clear roles and responsibilities: Define and document the specific duties of potential board members, officers, and committees. Ensure all board members understand their legal and fiduciary responsibilities.
Strategic planning and oversight: Actively participate in developing and regularly reviewing the organization's strategic plan. Monitor progress towards goals and provide guidance on major decisions.
Financial stewardship: Ensure proper financial oversight, including budget approval, regular financial reviews, and maintaining adequate financial controls.
Diverse and skilled board composition: Choose board members with diverse backgrounds, skills, and perspectives that align with the organization's needs and mission.
Regular board evaluation: Conduct annual self-assessments of the board's performance and individual member contributions. Use results to improve governance practices.
Ongoing board education: Provide orientation for new members and ongoing training for all board members to stay informed about the organization and nonprofit sector trends.
Ethical standards and conflict of interest policies: Develop and adhere to a code of ethics and conflict of interest policy. Regularly disclose and manage potential conflicts.
Executive oversight: Hire, support, and evaluate the executive director/CEO. Ensure a succession plan is in place for key leadership positions.
Mission-driven decision making: Align all board decisions with the organization's mission and values. Regularly review and refine the mission statement as needed.
Transparency and accountability: Maintain open communication with stakeholders and ensure transparency in reporting organizational activities and finances.
Effective meeting management: Conduct well-planned, focused board meetings with clear agendas and follow-up actions. Ensure all voices are heard and decisions are properly documented.
Fundraising involvement: Actively participate in fundraising efforts, including personal giving and leveraging networks to support the organization.
Risk management: Regularly assess and mitigate organizational risks, including financial, operational, and reputational risks.
Policy development and review: Establish and regularly review key organizational policies to ensure they remain relevant and compliant with current laws and best practices.
Stakeholder engagement: Foster relationships with key stakeholders, including donors, volunteers, and the communities served by the organization.
Wrapping Up
A nonprofit board of directors plays a critical role in defining the growth of nonprofit organizations. They have the power and responsibility to lay the foundation of success by implementing the right organizational policies and strategies. It's also essential to ensure they have proper protection.
Directors' and officers' liability insurance coverage protects them from expensive claims resulting from their actions while performing their organizational roles. It ensures that these potential costs don't keep nonprofit boards from doing their part to extend the nonprofit's mission.
Nonprofit boards can access software like Zeffy, which is 100% free, to boost their efforts in legally raising funds for their cause.
Nonprofit Board of Directors - Frequently Asked Questions
The right board size for a nonprofit will depend on its size, but ideally, it should be between three and 50 members.
For a large nonprofit, the board size would be larger, while for small nonprofits, it will be around three to five members. An effective board size is small enough to make decisions fast while leaving room for diversity of opinion and experience.
Nonprofit board insurance is essential because sometimes even the best actions result in a lawsuit. This is catastrophic not only for them and the organization's reputation but also for its donors and the people it serves.
Nonprofit directors and officers liability insurance can help against a possible lawsuit. It covers legal defense costs, settlements, investigation and judgments from a finding of breach of fiduciary duty in performing their role.
Employment practices liability insurance protects an organization against claims by employees or workers that their legal rights have been violated.
The insurance coverage helps protect against claims like wrongful termination, discrimination, and harassment.
The board of directors of a nonprofit has three main legal duties:
Duty of Care: Taking good care of the nonprofit by making prudent use of all the organization's assets, including people, facilities, and goodwill.
Duty of Loyalty: Working toward advancing the mission of the nonprofit and acting in its best interest.
Duty of Obedience: Ensuring the nonprofit obeys all essential regulations at the federal, state, and local levels and adheres to its own laws and mission/purpose.
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