Letting good deeds go unpunished: the Utah Revised Nonprofit Corporation Act.

• Author: McMullin, Colin W.
• Position: Legalbriefs

NATIONWIDE, CHARITABLE ORGANIZATIONS fill an increasingly important societal role. Utah is no exception. Between 1990 and 2002, the number of Utah charitable nonprofit corporations with Internal Revenue Service reporting requirements (those grossing more than $25,000) nearly tripled to more than 1,400 organizations. In addition, as of 2000, approximately 5,500 nonprofits without reporting requirements were registered with the IRS. Tax-exempt organizations are just one part of the Utah nonprofit community: As of mid-November 2004, nearly 21,000 Utah nonprofit corporations were registered to conduct business in Utah. Reporting organizations alone had $4.6 billion in expenditures in 2002--a significant impact on Utah's economy. Among these nonprofit corporations are credit unions, hospitals and organizations that support the homeless, housing and community development, education and the arts. To exist and thrive, nonprofit corporations need the participation of civic-minded and capable businessmen and businesswomen to fill positions as members of boards of directors.

Service as a director is, unfortunately, not without risk. As The Incredibles proves, even superheroes get sued when they do good deeds. However, unlike those heroes, directors are protected by the Utah Revised Nonprofit Corporation Act, which provides several built-in protections for directors. Two provisions, which apply only if the nonprofit is incorporated, are discussed below.

Protection Against Third-party Claims

 The directors ... of a nonprofit corporation are not personally liable in their capacity as directors ... for the acts, debts, liabilities, or obligations of a nonprofit corporation. ([section] 16-6a-115, Utah Code Ann. [2004]) 

According to the Act, a director's personal assets are not subject to judgments obtained by members of the general public against the nonprofit. A director is also insulated against claims directed against him or her relating to actions taken in the nonprofit's behalf.

However, if the organization is unincorporated, this liability protection vanishes. New businesses (including nonprofit corporations) often do not incorporate because their managers are nobly trying to reduce cash outflows, reduce burdens on volunteer (or meagerly paid) staff, or managers simply don't recognize the importance of incorporation. Director liability protection also disappears when the corporation loses its good standing with the state. A director contemplating...