How to Limit personal liability
Limiting of personal liability is cited as one of the greatest advanatges of incorporating a non profit orgnization. This may be true to a large extent however incorporation is a costly affair – in terms of the expenses involved, documents to be maintained, compliances to be undertaken, hiring of qualified staff and being ready for external audits and inspections.
For individuals wanting to start a non profit organization on a small scale, this is highly impractical.
On the other hand, If one decides not to incorporate, this could subject the members of the organization to personal liability in the event of the organization being sued. An unincoporated non profit thus often finds it difficult to attract quality members for fear of invoking of personal liability issues during its day to day transactions.
However Incorporation is not the only way in which a nonprofit organization can separate the personal and the organizational liabilities. Listed below are some of the alternate ways in which an organization can somewhat achieve this.
1) Providing for Indemnity clause in the bylaws – Most of the states in the United states have provisions for allowing indeminification. An indemnification clause in the bylaws of the organization is an undertaking by the organization to cover for all legal expenses and other incidental charges to prevent the organizational liabilities to fall upon its members. The insertion of indeminty clause in the by laws should be worded in clear and unambiguous terms.
A sample indemnity clause could read like – *(consult your local attorney)
“The organization agrees to indemnify, defend and save harmless the board members, its officers, directors and employees, from and against all liability, loss, cost or expense (including attorney’s fees) by reason of liability imposed upon the Client, arising out of or related to organization’s activities, whether caused by or contributed to by the members or any other party indemnified herein, unless caused by the sole negligence of the member or any other party indemnified herein.”
2)Personal Liability Insurance – Purchasing a personal laibility Insurance cover is similar to indemnification with a difference that the risk of liabilities is shifted to the Insurer, thus protecting both the members and the organization.
The flip side is that the organization needs to pay hefty premium for coverage and the coverage is also partial in most of the cases. For instance most of the insurance companies will not cover issues like anti trust, employment discrimination, criminal offences and a select civil offences. Insurers that cover these will charge an indiscriminately higher premium.
3)Immunity under statutes – Many states in the United States have passed laws that protect members of a non profit organization from incidences of personal liability. You will need to consult a qualified legal professional from your area for information on the protections available, if any.
If you are incorporating, you need not worry about indemnity or immunity. You can still consider taking an insurance cover to transfer the risk from the organization to the insurance company. If incorporation seems impractical, you should get the indemnity clause drafted in such a way to protect your members from incidences of personal liability.