The dirty dozen: twelve documents every attorney should review before serving on the board of a tax-exempt organization.

• Author: Goldberg, Adam Scott
• Position: Tax Law

You sit on the board of directors for a tax-exempt organization that provides a community theater to the neighborhood. The theater has been around for three decades, and you have been a board member for the last five years. The board meets three times a year. The most recent board meeting was pretty typical: After approval of the prior meeting's minutes, the chief executive officer presented his report, and the treasurer presented the financial report. Listening to the presentation of the financial report is rarely the high point of a board meeting. It is not uncommon to see people checking their iPhones or reviewing other handouts while secretly hoping that the financial report will end soon. Imagine your surprise a month later when you are served with a complaint for financial mismanagement of the theater seeking to hold you personally liable for allowing the treasurer to take off with $1,000,000 in assets. The immediate response is normally, "the audited financial statements did not reflect a problem."

As a board member, you are responsible for monitoring the reports to avoid a situation like this from occurring. A proper reading of the organization's bylaws would have made you aware that a finance committee and a separate audit committee must exist, and that each of those committees must meet quarterly. Unfortunately for you, neither the finance committee nor the audit committee was staffed, and neither had met for the last 10 years. How unlikely is this scenario? Fortunately, such lawsuits are rare, (1) and very few cases have occurred in Florida. Almost all of the published case law from Florida deals with homeowner or condominium associations, (2) which are a type of tax-exempt organization. (3)

Most tax-exempt organizations are governed by a board of directors that is empowered to carry out the exempt purpose of the organization. The board is the policymaker for the entity and is ultimately responsible for the operations and activities of the organization. Any CEO of a tax-exempt organization will tell you that he or she is always looking for attorneys to serve on the board of his or her organization. Attorneys often agree to serve on these boards without considering the responsibilities and consequences of such service.

The federal government, through the Internal Revenue Service, and the state of Florida, through the Florida Department of Agriculture and Consumer Services (FDAC), along with the Florida attorney general, provide much regulatory supervision of tax-exempt organizations.

F.S. [section] 617.0830 states that a director of a Florida not-for-profit corporation is not liable if he or she acted, or failed to act, provided his or her duties were performed in good faith and in the best interest of the entity, using the level of care an ordinary person in a similar position would exercise in similar circumstances. This statute shields board members against liability, except for those cases involving self-dealing or bad faith.

F.S. [section] 617.0834 grants immunity from civil liability to board members and officers who serve without compensation on a Florida not-for-profit organization that is organized under I.R.C. [section][section] 501(c)(3) through 501(c)(6).

Pursuant to F.S. [section] 607.0850, most tax-exempt organizations, other than condominium associations, cooperative associations, homeowners' associations, and timeshare management groups, are permitted to indemnify any person who is serving as a director. Under F.S. [section] 607.0850, an organization has the power to indemnify any person who was a director against liability incurred in connection with any proceeding, (4) provided the person acted in good faith and in a manner he or she reasonably believed to be in the best interests of the organization, and provided the person had no reasonable cause to believe his or her conduct was unlawful or criminal. (5) If this protection is afforded through insurance, the type of insurance is often called a directors & officers (D&O) insurance policy. (6) If an organization has D&O insurance, be sure to inquire as to the policy limits and coverage to ensure that you, as a board member, are covered.

Some of the larger private foundations, hospitals, and other charities may...