Page 43 - Washington Nonprofit Handbook 2018 Edition

PART 3. GOVERNANCE AND OPERATIONS

CHAPTER 11. Importance of Acting Like a Corporation

a. Limited Liability Notes on Terminology for Part III

A nonprofit corporation is a The terms “director” and “board member” are
legal entity separate and distinct from used interchangeably; the terms “corporation”
its directors, officers and employees. and “organization” are also used
As such, liabilities and obligations interchangeably; the term “officer” is used when
incurred by the corporation, in the referring to a director that has been elected to a
absence of unusual circumstances, leadership position on the board; and the term
must be satisfied out of the assets of “member” is used in reference to those
the corporation and do not “pass organizations with a membership group that
through” to its directors, officers or has voting rights.
employees. Put another way, a
corporation provides a limited shield to its directors, officers and employees
against payment of liabilities and obligations incurred by the corporation.

b. Personal Liability

In certain circumstances, a director, officer or member of a corporation may
become personally liable for the corporation’s liabilities and obligations. This may
occur if the corporation’s officers, directors or members fail to maintain the
corporation’s separate legal identity by confusing their individual identity with that
of the corporation. This confusion of identities generally occurs when one or more
of the directors, officers or members of the corporation mix their personal,

individual interests with the corporation’s business, often for personal gain. In such
cases, a court may choose to disregard the corporate entity created and hold the
individuals acting on behalf of the corporation (i.e., the directors, officers or
members) personally responsible for the corporation’s liabilities and obligations. A
court may choose to impose personal liability in this manner even though articles
of incorporation creating the corporation, which limit an individual’s liability, have
been filed.

Courts and the Internal Revenue Service (“IRS”) give particular scrutiny to
cases involving a small number of individuals who fill multiple roles within the
corporation, which is very common for a new nonprofit corporation. In deciding
whether liabilities and obligations of a corporation will “pass through” to officers or
directors, courts and the IRS scrutinize the corporation and its operation to decide

if the corporation meets certain minimum standards for consideration as a

WASHINGTON NONPROFIT HANDBOOK -32- 2018