Nonprofit organizations are critical pillars in society, offering services, advocacy, and relief in ways that often fill the gaps left by government programs or the private sector. But when a nonprofit makes a misstep—whether financial, ethical, or operational—questions quickly arise: who is legally responsible? Is it the organization itself, the board members, executives, or volunteers?
Understanding the chain of accountability is essential, especially in a complex jurisdiction like New York. A qualified attorney for non-profit organization clients can help navigate these complexities, ensuring that charities stay compliant while fulfilling their mission.
Understanding the Legal Structure of Nonprofits in New York
Nonprofit organizations in New York are primarily governed by the New York Not-for-Profit Corporation Law (N-PCL), which establishes the legal framework for the formation, operation, and governance of these entities.
Under the law, a nonprofit is considered a separate legal entity from the individuals who run it. This distinction provides a layer of protection for those involved—such as board members and officers—so long as they operate within the bounds of their duties and legal obligations.
Despite this legal separation, individual accountability can still arise in specific circumstances. A not-for-profit organization lawyer can advise clients on how to structure internal controls, adopt compliant governance practices, and avoid situations where individual liability may arise.
Primary Liability Lies with the Organization
In most cases, the nonprofit itself bears the legal responsibility for its actions. If a charity breaches a contract, is sued for negligence, or fails to meet employment law standards, the organization as a corporate entity is the party named in lawsuits. This is why the nonprofit must maintain adequate liability insurance, follow fiduciary best practices, and adhere strictly to state and federal regulations.
Nonprofits that fail to maintain their corporate formalities—such as holding annual board meetings, filing appropriate tax documentation, or segregating personal and organizational funds—risk “piercing the corporate veil.” In such cases, courts may allow plaintiffs to go after individuals within the organization for damages. Any New York City charity attorney can attest that these scenarios, while rare, can lead to severe financial consequences.
When Board Members and Officers Can Be Held Personally Liable
Although the general rule favors limited liability for board members and officers, New York law outlines specific exceptions under which individuals may be personally liable. These include:
- Breach of Fiduciary Duty – Directors and officers owe fiduciary duties of care, loyalty, and obedience to the organization. If they make decisions that are grossly negligent, self-serving, or outside the nonprofit’s mission, they can be sued by the state attorney general or harmed parties.
- Self-Dealing and Conflicts of Interest – Transactions that benefit a director or officer personally, especially without disclosure or approval, can result in liability under the N-PCL and IRS regulations. A not-for-profit organization lawyer will typically advise on how to draft and enforce a robust conflict of interest policy.
- Improper Use of Funds – Misuse of restricted donations, commingling funds, or using assets for personal gain exposes individuals to criminal and civil liability.
- Employment Law Violations – Directors who participate in discriminatory hiring practices or wage violations may be individually named in lawsuits.
- Tax Violations – The IRS can impose “intermediate sanctions” against individuals who receive or approve “excess benefit transactions,” including significant penalties.
Role of the Attorney General in Oversight
In New York, the Charities Bureau of the Attorney General’s Office plays a crucial enforcement role in the nonprofit sector. The bureau is authorized to investigate and take legal action against organizations and individuals suspected of fraud, mismanagement, or abuse of charitable assets. In high-profile cases, board members and executives have been held personally liable for mismanagement or unauthorized use of philanthropic funds.
For instance, the New York Attorney General filed suit against the Trump Foundation in 2018, alleging that the charity operated with “a pattern of persistent illegal conduct.” The result was a court-ordered dissolution and millions in restitution. Such cases highlight how seriously New York authorities take violations within charitable organizations.
Employment and Volunteer Misconduct: Who’s Responsible?
Another common scenario involves misconduct by employees or volunteers—such as harassment, theft, or negligence. Whether the nonprofit is held liable depends on several factors, including the individual’s role, whether the misconduct occurred within the scope of their duties, and whether the organization took reasonable steps to prevent harm.
Generally, a nonprofit may be vicariously liable for its employees’ actions under the legal doctrine of “respondeat superior.” If a volunteer acts recklessly or injures someone while performing an official duty, the organization may also be held liable, although courts scrutinize volunteer-related cases more closely.
Retaining an attorney for counsel of a non-profit organization is often essential when creating volunteer agreements, employee handbooks, and internal complaint procedures that reduce legal exposure.
Insurance and Indemnification Protections
Most nonprofits carry Directors and Officers (D&O) liability insurance to protect individuals from personal losses stemming from their work with the organization. Additionally, the N-PCL permits nonprofits to indemnify their directors, officers, and employees for legal expenses incurred in defending themselves, provided they acted in good faith and the best interests of the organization.
However, indemnification does not apply in cases involving willful misconduct, fraud, or criminal behavior. In those instances, a New York City charity attorney can provide representation or counsel on navigating the fallout.
IRS Enforcement and Personal Liability
The IRS also has the authority to hold individuals within a nonprofit accountable for misuse of tax-exempt status. One central area of concern is the “excess benefit transaction,” where a person of influence—called a disqualified person—receives unreasonable compensation or benefits. Under Internal Revenue Code Section 4958, the IRS can impose a 25% excise tax on the disqualified person and a 10% tax on any organization manager who knowingly approved the transaction.
Additionally, individuals who sign off on fraudulent or incorrect IRS Form 990 returns may be held liable for perjury or tax fraud. Consulting a lawyer from a not-for-profit organization can help board members and executives understand these risks and avoid missteps.
Whistleblower Laws and Retaliation Liability
New York law requires nonprofits with more than 20 employees or annual revenues exceeding $1 million to implement whistleblower policies. These are designed to encourage reporting of unethical or illegal conduct within the organization. Retaliation against whistleblowers can expose both the organization and individual perpetrators to liability.
Cases involving whistleblower retaliation are often emotionally charged and carry reputational risks. Working with an attorney for non-profit organization compliance issues is crucial for establishing legally sound reporting channels and investigating complaints in a lawful and ethical manner.
How Bylaws and Internal Policies Influence Liability
A nonprofit’s bylaws, board resolutions, and internal policies play a significant role in establishing who is responsible for various decisions. Well-drafted bylaws should clearly define officer roles, indemnification rights, and conflict of interest procedures.
When bylaws are vague or unenforced, legal ambiguity increases. Plaintiffs may argue that unclear oversight mechanisms contributed to harm. Therefore, organizations often seek the guidance of a New York City charity attorney to revise or interpret their governance documents.
Bankruptcy and Dissolution Scenarios
If a nonprofit dissolves—voluntarily or due to financial or legal troubles—liability questions often escalate. The N-PCL requires organizations to file a plan of dissolution with the Attorney General and potentially the courts, demonstrating that assets will be used appropriately or distributed to another qualified nonprofit.
However, individuals may be held liable if the dissolution was prompted by fraud, embezzlement, or unpaid debts, particularly when personal guarantees were made. Understanding the legal obligations during the winding-down process is another area where legal counsel is essential.
Best Practices for Limiting Individual and Organizational Risk
While the law allows for accountability, proactive governance significantly reduces the likelihood of personal liability. Recommended best practices include:
- Holding regular, documented board meetings
- Keeping accurate and timely financial records
- Implementing a conflict-of-interest policy
- Requiring annual board training on fiduciary responsibilities
- Purchasing appropriate insurance (D&O, general liability, employment practices)
- Having a compliance checklist reviewed by a not-for-profit organization lawyer
Proactive legal planning not only protects individuals but also safeguards the mission and reputation of the nonprofit.
Legal Accountability Starts with Smart Governance
Legal accountability in nonprofit organizations is a nuanced topic that blends state law, federal tax regulations, corporate governance principles, and ethics. While most liability falls on the organization itself, individuals involved in management or oversight can be held responsible under specific circumstances. Staying informed and retaining a qualified attorney for non-profit organization matters ensures that those dedicating themselves to public service don’t end up entangled in legal trouble.
Whether reviewing bylaws, addressing a complaint, or planning for long-term compliance, working with a seasoned New York City charity attorney helps nonprofit leaders avoid liability, maintain public trust, and focus on what matters most—serving their community.
