Incorporated nonprofits have a board of directors that makes major decisions for the organization while guiding and governing its mission and purpose. These directors — also called board members — oversee strategic planning, budgeting and financing activities, policy development, and management-level hiring. Directors typically receive no payment for their services and serve as volunteers. If a nonprofit opts to pay a director for serving on its board or for other services related to their director role, then, for tax purposes, the nonprofit must pay that person as an independent contractor. This is because a director’s governance role makes them ineligible for employee status.
Because nonprofits exist as separate entities from their founders, a nonprofit’s board of directors plays a critical role. Long after the lives of its founders, a nonprofit’s board continues to guide and govern to ensure the organization stays true to its mission and purpose. That means directors can set the tone for a nonprofit’s programs and services as well as affect its reputation. As board members change, it’s therefore important to consider who currently serves on the board and what each individual brings to the table.
Given the typically volunteer nature of a director’s service, most nonprofits seek directors with a deep understanding of — and passion for — their organization’s purpose. In addition, nonprofits should strive to create a board of directors that features a diverse mix of people with different backgrounds, skills, and strengths that complement each other and add value to the organization. For example, a director with a legal background can advise on legal issues and read contracts while a director with finance and accounting experience can provide guidance on budgeting and other related issues. If your organization offers youth programs or operates some type of school or educational program, you may want a teacher and a parent on your board. Ultimately, the members of a nonprofit’s board of directors should reflect its community.
Board Member Duties
Board members have formal legal responsibilities as well as other tasks they should, ideally, complete while serving in this role. It’s important to ensure your board members understand their responsibilities and fully commit to them when they accept this position.
Different states have different laws about board member governance and conduct. Because nonprofit organizations must incorporate in the state in which they base their headquarters, it’s important to check your state’s specific rules. However, every nonprofit board of directors — nationwide — must ensure their organization’s members and staff conduct themselves and the activities of the nonprofit legally and ethically. Most states follow the three key principles of nonprofit corporation law: duty of care, duty of loyalty, and duty of obedience. Here’s a brief overview of each:
- Duty of Care: Because board members actively participate in a nonprofit’s decision-making process, they must exercise “reasonable care” when making decisions. The law defines reasonable care as what an “ordinarily prudent” person would do in a similar situation.
- Duty of Loyalty: Board members must always act in the best interests of the nonprofit and avoid using information gained from their position for any personal gain. They also must avoid conflicts of interest as well as the appearance of any such conflicts.
- Duty of Obedience: Board members must act in line with the nonprofit’s mission and goals. That includes ensuring the organization abides by the law, approving all key contracts, attending most (if not all) board meetings, and hiring and supervising the executive director who then hires the staff. They also must ensure the nonprofit stays financially solvent by evaluating its financial policies, approving budgets, and reviewing financial reports.
Depending on your organization’s needs, you may task board members with other responsibilities like fundraising, attending certain events, or completing a certain number of volunteer hours. Many nonprofit organizations now expect board members to contribute to their fundraising efforts. While board members don’t need to donate large sums of money themselves, most must actively participate in their nonprofit’s fundraising activities.
A nonprofit’s board of directors elects the organization’s officers, which typically include a president, vice president, treasurer, secretary, and executive director/chief executive officer (CEO). Most states require nonprofits to elect at least a president, treasurer, and secretary while other states require certain additional positions. Your board also may choose to elect people to fill other positions, such as vice president or executive director/CEO. However, the executive director/CEO role typically only exists in for-profit organizations or large nonprofits.
Unlike directors, officers receive payment for their services as an employee because they work under the direction and control of the board of directors to run and manage a nonprofit’s day-to-day business. A nonprofit can, however, have an officer it considers an independent contractor if it doesn’t pay that individual and that individual performs limited or no services for the nonprofit. Because this person receives no payment, a nonprofit need not pay or withhold any employee taxes and, therefore, doesn’t need to consider that person an employee.
Here’s an overview of the main officers’ roles:
- President: The president leads the board and supervises its business and affairs. This individual should, therefore, have strong leadership skills as well as a deep commitment to the nonprofit’s mission. Ideal candidates for this role also will have strong relationships throughout the community they can leverage to help promote the nonprofit’s mission and goals.
- Vice President: The vice president fills the president’s shoes whenever the president is unavailable. In the event the president steps down or reaches the role’s term limit, this person usually serves as the next president. Some nonprofits’ bylaws even mandate that their vice president will become their next president.
- Treasurer: The treasurer keeps track of a nonprofit’s receipts, spending, and overall financial health. This officer informs the other board members of the nonprofit’s financials on a regular basis. The treasurer, however, does not have the same responsibilities as a nonprofit’s bookkeeper. The bookkeeper records the organization’s income and expenses, and prepares its financial statements. In contrast, the treasurer reports on the big picture. Ideal candidates for treasurer should feel comfortable working with numbers and interpreting financial reports as well as providing strategic counsel on financial decisions.
- Secretary: The secretary takes notes and prepares the minutes for each board meeting. This individual also informs board members about future meetings and updates. In addition, the secretary keeps track of the nonprofit’s activities and ensures those activities align with the organization’s bylaws.
- Executive Director/CEO: The executive director — sometimes referred to as the CEO — runs a nonprofit’s day-to-day operations and acts as a liaison between the board of directors and other managers or staff.
Directors Who Also Serve as Officers
As a best practice, most nonprofits elect separate people to serve in officer and director positions to avoid conflicts of interest. However, a nonprofit director may also serve as an officer. In this situation, a nonprofit would pay the director as an employee for their work as an officer and as an independent contractor for their services as a director — unless the individual volunteers their time in their director role.
Many small or new nonprofits find it challenging to fill all the required officer positions so often elect directors to also serve as officers. That makes it critical for nonprofits to create strong conflict of interest policies so they can avoid or properly address any potential, apparent, or actual conflicts. Furthermore, any director also serving as an officer should avoid voting on any issues that affect them in their officer role.
Trustees play a similar role to directors of charitable foundations or trusts. Trustees owe a fiduciary duty to the charitable trust the same way directors of other nonprofits do, but state statutes hold trustees to a higher standard than directors because trustees owe a fiduciary duty to a trust’s beneficiaries.
Directors, on the other hand, owe a fiduciary duty to the nonprofit — not necessarily directly to the beneficiaries of the nonprofit’s activities and programs. For example, directors may face liability for gross negligence while trustees may face liability for simple negligence. Trustees also have a duty to account for and render information to beneficiaries. In some states, trustees owe an absolute duty of loyalty to the trust. This prohibits any self-dealing, even if approved by co-trustees.
Directors, officers, and trustees each serve important roles in a nonprofit. A clear understanding of their differences is essential for the effective organization of your nonprofit. While most nonprofits separate their directors from their officers, it’s possible to have certain directors also serve as officers as long as you avoid conflicts of interest and ensure your nonprofit’s mission remains the top priority.
Consider your nonprofit’s specific needs, and then make sure each of your directors, officers, and/or trustees know and understand your organization’s mission and work.