Nonprofit Board Fiduciary Duties: A legal guide for directors in MA, NY, CT & DC
Nonprofit directors in Massachusetts, New York, Connecticut, and Washington, DC are held to a higher legal standard than their for-profit counterparts. These obligations are known as fiduciary duties: the duty of care, duty of loyalty, and duty of obedience. And they govern every major decision a board makes from executive compensation to conflicted transactions. Failure to fulfill these duties can expose individual directors to personal liability and put the organization’s tax-exempt status at risk. This guide explains what each duty requires, how the law applies differently across all four jurisdictions, and what boards should do to stay compliant and mission-focused.
What it means to serve
When I was in college, I served as the student representative on Salem State University’s Board of Trustees. From my first day on the Board, it immediately became clear that this was no ceremonial seat. The other trustees routinely talked about their role as fiduciaries, and it was obvious that they approached every decision through a wide lens—they considered long-term plans, short-term implications, mission, and organizational health.
In the nonprofit context, the term fiduciary refers to a person who holds a position of trust and is legally obligated to act in the best interests of another (e.g., the trustee of an estate). Nonprofit directors are trustees of the organization’s assets and its mission (the key differentiator from a for-profit corporation) with legal duties among the highest imposed by law. This fiduciary relationship is behind the core legal obligations of any nonprofit director: the duties of care, loyalty, and obedience. And this heightened scrutiny means fulfillment of these duties carries real stakes. Failure to fulfill fiduciary duties can lead to a director’s personal liability, organizational collapse, and loss of tax-exempt status. While these duties are not complicated, it is critical to understand and internalize them, because the margin for error is smaller than most boards or directors realize.
The three fiduciary duties: care, loyalty, and obedience
Nonprofit directors are subject to three specific fiduciary duties: the care, loyalty, and obedience. As discussed below, there are nuances to each of these duties depending on the state. But these duties can be summarized as follows:
Duty of Care: The duty to act with reasonable prudence and make informed decisions.
Duty of Loyalty: The duty to act in the organization’s best interests while avoiding conflicts.
Duty of Obedience: The nonprofit-specific duty to maintain fidelity to mission and the governing documents.
The business judgment rule
Think of the business judgment rule as a shield when a nonprofit director’s duty of care is in question. Under this rule, there is a presumption that directors acted on an informed basis, in good faith, and in the honest belief that their actions were in the best interests of the organization. But to raise this defense, directors must (1) be informed by reviewing all material information reasonably available before making decisions, (2) act in good faith rather than merely rubber-stamping management actions, and (3) reasonably believe that they are acting in the organization’s best interests. Assuming all three elements are met, a director would only be found to breach their duty of care if they acted with gross negligence (a heightened form of negligence involving conscious and significant disregard for a duty). It is important to note that the business judgment rule does not protect directors when they have conflicts of interest or act in bad faith, nor does it apply when they fail to advance the organization’s charitable mission (i.e., violate their duty of loyalty or obedience).
Fiduciary duties in MA, NY, CT, and DC
Across the jurisdictions we serve, we see nuanced differences in both the authority behind, and the application of, these fiduciary duties. For example, at the Federal level, court decisions are the primary source of these duties, and those came from judges applying the same standards as used for for-profit corporate directors.
Massachusetts
Massachusetts bases two of its fiduciary duties in statute. M.G.L. c. 180 § 6C. It requires directors to employ “such care as an ordinarily prudent person in a like position with respect to a similar corporation organized under this chapter would use under similar circumstances.” That same statute splices in the duty of loyalty by requiring good faith work “in a manner [the director] reasonably believes to be in the best interests of the corporation.” Interestingly, Massachusetts does not establish a separate duty of obedience by statute or caselaw. Still, M.G.L. c. 180 § 6 requires nonprofits to maintain fidelity to their articles and Massachusetts law more broadly, a hook through which we can interpret an implied duty of obedience. And directors’ responsibility to ensure the organization fulfills its charitable purpose are barely a step removed from the duty of obedience, as defined above.
New York
New York nonprofits operate in an aggressive enforcement arena. New York’s duty of care obliges directors, officers, and key persons to discharge duties of their respective positions in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. N.Y. Not-for-Profit Corp. § 717. This standard varies according to the type of corporation involved and the particular circumstances. For example, one case involving a family foundation found that allegations of mismanagement of the foundation’s investments and negligent selection and supervision of the investment advisor could constitute a breach of the duty of care.
New York courts have also established the duty of loyalty, prohibiting directors from improperly benefiting from the organization and requiring directors to refrain from using their positions for personal benefit and to always act in the organization’s best interests. The courts explicitly define the duty of obedience as requiring “the director of a not-for-profit corporation to be faithful to the purposes and goals of the organization,” because “unlike business corporations, whose ultimate objective is to make money, nonprofit corporations are defined by their specific objectives: perpetuation of particular activities are central to the raison d'être of the organization.” Manhattan Eye, Ear & Throat Hosp. v. Spitzer, 715 N.Y.S.2d 575 (N.Y. Sup. Ct. 1999). State courts have applied these principles in various contexts, including challenges to fundamental corporate changes. The robust enforcement environment means directors in New York must maintain even greater vigilance over their fiduciary duties.
Connecticut
Connecticut’s statutory standard closely mirrors Massachusetts: it requires exercising “the care an ordinarily prudent person in a like position would exercise under similar circumstances.” Conn. Gen. Stat. § 33-1104. But in addition to the nearly identical definition of loyalty, Connecticut separately maintains several statutes providing detailed frameworks for addressing conflicts of interests and corporate opportunities. Conn. Gen. Stat. §§ 33-1127–1131. Also like Massachusetts, Connecticut does not explicitly recognize a duty of obedience as a separate fiduciary duty, but it does permit Directors to challenge unauthorized corporate acts. Conn. Gen. Stat. § 33-1038. Note that Connecticut maintains strict limitations on private enforcement of charitable obligations. For example, the Attorney General has the “exclusive authority to enforce the terms of a charitable gift” in order to limit the number of potential private lawsuits against which a nonprofit might have to defend itself. Derblom v. Archdiocese of Hartford, 346 Conn. 333 (2023).
The District of Columbia
In DC, the duty of care requires directors to discharge their responsibilities “with the care that a person in a like position would reasonably believe appropriate under similar circumstances.” D.C. Code § 29-406.30. The duty of loyalty requires directors to act (1) in good faith, and (2) in a manner the director reasonably believes to be in the best interests of the corporation. Id. For example, receiving a financial benefit to which the director is not entitled violates this duty. D.C. Code § 29-406.31. The duty of obedience can be inferred from these statutes – it is not explicitly codified – and court cases have confirmed that directors owe fidelity to their organization’s governing documents. For example, in a case involving the Washington City Orphan Asylum, the D.C. Court of Appeals found that a nonprofit’s trustees violated their obligations when they unilaterally ousted the Board of Directors and ceased funding in violation of the organization’s dual-board governance structure. It sounds extreme, but the convenience of smaller meetings outside of formal Board gatherings can evolve into governance problems.
Note that across jurisdictions, it is generally permissible – and sometimes required – for directors to rely on information from officers, employees, legal counsel, or other authorities when making decisions, provided the director does not have knowledge that makes that reliance unwarranted. Directors should engage qualified advisors on matters outside their expertise, and they should document that reliance.
Conflicts of Interest
Avoiding conflicts of interest is inherent to the duty of loyalty. Conflicts and self-dealing also implicate the organization’s tax-exempt status, which prohibits “private inurement” or the profiting of an individual from the nonprofit’s resources. While some states like Connecticut have detailed frameworks for addressing them, others prohibit them more broadly and require organizations to establish their own policies. Regardless, it is part and parcel of directors’ fiduciary obligations to understand what is and is not a conflict, oversee proper disclosure and recusal procedures, and avoid self-dealing transactions, which invite IRS scrutiny.
Conflict procedures are governed by a framework of Federal tax and state corporate law requirements. And there are real consequences for the organization and the conflicted individual for violations. In general, a conflict of interest is a situation in which a Director – current or former – stands to personally benefit – directly or indirectly – from their organization. Many directors are surprised to learn that a conflict can exist between the organization and a director’s family member, too, regardless of the related person’s degree of involvement in the director’s work. More situations are conflicts than most directors assume.
But just because a conflict exists, does not mean that liability follows or that the organization cannot proceed with a proposed course of action. Organizations must maintain effective policies that ensure proper disclosure, define recusal procedures, facilitate independent review, and enable ratification by disinterested persons. They must mandate documented disclosures of conflicts (ideally through routine disclosure updates), board discussion, and recorded votes and actions taken to mitigate those conflicts. In some situations, it is advisable and even required to rely on independent experts to assess the fairness and legal compliance of a conflicted transaction. Note that each of our four jurisdictions employ different rules governing how an organization navigates a potential conflict.
When a nonprofit moves forward with a conflicted transaction, it is imperative that the cost be at or below the fair market value. Paying above market value is considered an “excess benefit transaction”, and the delta between the fair market value and the amount paid is the excess benefit. 26 U.S.C. § 4958(c). The consequences of excess benefit transactions can include revocation of tax-exempt status (typically reserved for the most extreme cases) or lesser “intermediate sanctions”, which are penalty taxes on the individuals involved in the transaction, including all directors, the chief executive, chief operating officer, and chief financial officer (regardless of title). It is possible to establish a rebuttable presumption that the transaction does not confer an excess benefit, which would shift the burden to the IRS to show that the transaction is excessive (and they have never tried to do that). To establish that presumption, an organization essentially needs to follow a process involving comparability data and potentially consult with an outside expert if the organization’s revenue exceeds $1 million.
As indicated above, effective conflict of interest policies detail procedures to receive and independently review disclosed conflicts. They must also define the scope of covered transactions, individuals, and the approval process. Employing comprehensive procedural safeguards that facilitate fair dealing, avoid private inurement, and help preserve tax-exempt status minimizes the risks of IRS sanctions and reputational harm.
Executive Compensation
It may come as no surprise that nonprofit executive compensation is primarily governed by the intermediate sanctions involving excess benefit transactions discussed above. These are Federal rules, though states’ Attorneys General may have some oversight authority. When the IRS discovers an excessive benefit, it imposes a 25% excise tax on the person receiving the benefit, with an additional 200% tax if it is not corrected. 26 C.F.R. § 53.4958-1. Directors or managers may also be personally liable if they knowingly approved the transaction, and they face a 10% excise tax on the excess benefit amount, unless they unwilfully participated and the error was reasonable. Id.
The rebuttable presumption discussed above is a defense put in place before it is needed. It means that an organization can be protected when they follow proper approval processes when setting executive compensation. And there are three specific requirements: approval by an authorized and disinterested body, consideration of appropriate comparability data, and adequate documentation. 26 C.F.R. § 53.4958-6.
The authorized body must be entirely disinterested individuals, and it may include the organization’s board or a committee. For compensation decisions, comparability data includes “compensation levels paid by similarly situated organizations, both taxable and tax-exempt, for functionally comparable positions; the availability of similar services in the geographic area of the applicable tax-exempt organization; current compensation surveys compiled by independent firms; and actual written offers from similar institutions competing for the services of the disqualified person.” Id. Again, if an organization has less than $1 million in annual gross receipts, data from three comparable organizations may suffice, but if the organization has more than that, a much more thorough report must be considered. And consistent with the duties discussed above, it is not enough to simply defer to a consultant—the board must review that information, ask questions, and apply its own expertise and scrutiny in order to fulfill its obligations.
In practice, we see boards make consistent mistakes when setting executive compensation: they reach a salary determination without following processes to establish the safe harbor, they do not include the value of all benefits in the compensation package, or they improperly characterize certain reimbursements or below-market loans such that they might receive excess benefit scrutiny. While complete loss of tax-exempt status is rare and reserved for the most egregious violations, this is an area where nonprofits easily and inadvertently expose themselves to risk. Putting in place sufficient policies up front is the best defense against costly troubles down the road.
Financial Oversight
Although oversight of a nonprofit is not about maximizing profits, directors’ fiduciary duties require all directors – even those without a financial background – to be reasonably informed and actively engaged in oversight using all available information and inquiry to make prudent decisions. They must ensure transparency in financial matters and be vigilant for red flags like unexplained financial discrepancies, ineffective internal controls, or repeated audit exceptions, which may be signs of misconduct or fiduciary breaches. Failing to monitor or catch these lapses may constitute bad faith and therefore a breach of fiduciary duties.
Audit committees, which oversee internal audit functions, external auditors, and the integrity of financial reports, are a critical tool in financial oversight. In New York, they are mandated for organizations required to file independent audits with the Attorney General and with annual revenue exceeding $1 million. N.Y. Not-for-Profit Corp. § 712-a. Although other states do not yet have this requirement, they are increasingly expected as a governance best practice.
While the audit committee is the front line defense, the entire board is still expected to protect against financial mismanagement. All directors have a duty to investigate irregularities and warning signs that could indicate mismanagement or misconduct. Things like fraud, theft, waste in management, inadequate internal controls, and compliance violations are all major red flags that should be investigated and dealt with urgently. A predicate to this oversight is to implement a system for reporting suspected irregularities (i.e., whistleblower policies) in order for the board to become informed of risks or problems requiring their attention.
One of the most serious fiduciary violations a nonprofit director can commit is mishandling donor-restricted funds. This happens when contributions intended for a specific purpose are commingled and not clearly separated from general operating expenses. States vary in how much separation is required, and while maintaining separate accounts is not always necessary, it is safe to assume a broad requirement to maintain strict and separate accounting records. New York states the requirement succinctly, requiring “accurate accounts to be kept of [restricted] assets separate and apart from the accounts of other assets of the corporation.” N.Y. Not-for-Profit Corp. § 513.
When things go wrong: enforcement and personal liability
Nonprofit directors enjoy limited liability related to their service and robust statutory protections. But they are individually and organizationally subject to enforcement actions through multiple mechanisms, generally in cases involving duty of loyalty breaches, intentional misconduct, or grossly negligent acts. Depending on the jurisdiction, these can be brought by state attorneys general, private litigation, and IRS sanctions. But, directors have the protection of a cap on potential liability, immunity in various circumstances, and indemnification through their organization. And recall that the business judgment rule shields directors from damages absent bad faith or self-dealing.
Still, the scope of protection and potential liability is a state-specific question. In DC, section 29-406.31 of the code establishes standards of liability for when directors can be held liable, and there is a presumption that directors are acting properly unless a specific violation is proven. For example, a “sustained failure of the director to devote attention to ongoing oversight of the activities and affairs of the corporation, or a failure to devote timely attention, by making, or causing to be made, appropriate inquiry, when particular facts and circumstances of significant concern materialize” is an actionable breach. This means directors must provide ongoing oversight and react and investigate when problems arise.
Building and maintaining a solid governance foundation
There is a narrative spun across jurisdictions and woven through the law of nonprofit directors’ fiduciary duties: directors of charities are held to stricter standards than their for-profit counterparts. Most notably because they occupy a position of public trust in which they benefit from tax-exempt status and serve as stewards of donor funds intended for charitable purposes.
As we see from each state’s enhanced accountability standards, which bring the potential of personal liability for breaches, there are several practical implications to take away regardless of jurisdiction:
Director education and compliance programs are essential for organizational risk management.
Recognize and understand the mission-centered governance requirements in your state.
Conduct regular mission alignment assessments and document how major decisions further charitable purposes.
Creating and documenting adequate information-gathering processes and decision-making rationale can ensure that the directors always steer toward good faith decision-making, which will be protected when questioned.
Conclusion
In the years since serving on my college’s board of trustees, I became a nonprofit lawyer and now serve on my alma mater’s alumni association. The education of all those experiences deepened my understanding of what it means to be a fiduciary and why we have these requirements in the first place. Private individuals donate hard-earned money to charities of their choice. The Federal government exempts those charities from paying taxes in recognition of the services the perform for society. And the people managing those entities are rightly held to a higher standard to ensure responsible oversight. For this reason, the law imposes the fiduciary duties of care, loyalty, and obedience to see those charitable purposes fulfilled. These duties are the legal infrastructure that creates organizational trust—donors feel confident their funds will go toward the intended purpose, the government forgoes tax revenue in exchange for a public service, and beneficiaries of nonprofit programming receive the best service possible. When fiduciary duties are met, all three spokes of that wheel benefit. If your board has not reviewed its conflict policies, compensation procedures, or financial oversight practices recently, the question is not whether something is wrong; it is whether you would know.
Questions about your board’s governance obligations? Commonlight Legal advises nonprofit boards and executive directors in Massachusetts, DC, New York, and Connecticut on governance, compliance, and employment law. Contact us to schedule a consultation at https://commonlightlegal.com/appointments.
Alex Booker is the Managing Partner of Commonlight Legal LLP, a boutique law firm serving nonprofits in Massachusetts, Washington DC, New York, and Connecticut. He advises nonprofit boards and executive directors on employment law, governance, and compliance.
Before founding Commonlight, Alex served as an Attorney Advisor at the U.S. Department of Education's Office of General Counsel, adjudicated federal employment cases at the U.S. Merit Systems Protection Board, and litigated whistleblower and civil rights matters on behalf of employees at a DC plaintiff-side employment firm. Earlier in his career, he served as Research Director for a Massachusetts Joint Legislative Committee. Alex is admitted to practice in Massachusetts and Washington, DC.
This article is for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. For advice specific to your organization's situation, contact Commonlight Legal LLP.