The Three Amigos of Nonprofits: Directors, Officers, and Incorporators

Incorporators essentially “breathe life” into a nonprofit corporation by conducting the initial organizing tasks, which include filing the charter, appointing the board, calling the first meeting, and, if desired, adopting the bylaws.  Tennessee, like most states, provides a charter form that requires the identification of at least one incorporator.  Often the founders or the attorney setting up the corporation will serve as incorporator.  Once incorporators serve their purpose, they should resign and the resignations should be recorded in the minutes.

Directors are individuals who, together as a “board”, govern and oversee a nonprofit.  A nonprofit exists and receives tax-exempt status because it serves the American public, therefore state and federal law require each nonprofit to be governed by a board of directors that is ultimately responsible for the acts of the organization.  Accordingly, it is useful for directors to view themselves as representatives of the taxpaying public. 

Each director must comply with two legal, or fiduciary, duties in doing her job.

1.            Duty of Loyalty – to act solely in the best interests of the organization and not to seek a personal benefit from the nonprofit’s business activities.

2.            Duty of Care – to act reasonably and prudently, to be familiar with the organization’s activities, to make informed decisions, and to participate regularly in board meetings.

Directors can be held personally liable if they breach one of these duties and the nonprofit is harmed.  Most often, Duty of Loyalty is breached when a director engages in an activity that constitutes a conflict of interest – e.g., directs a contract to her personal business.  A breach of Duty of Care is usually an act of neglect – e.g., the board fails to review the organization’s financial statements at meetings and consequently fails to detect a manager’s misuse of funds.

It is important to note that the board of directors is not responsible for the day-to-day operation of the nonprofit.  Rather, it should oversee the operations by hiring a qualified CEO or Executive Director, regularly receiving reports from management regarding the organization’s finances and operations, and approving an annual budget and other fundamental policies to govern the operations.  

Most states set a minimum number of directors.  The Tennessee Nonprofit Corporations Act (TNCA) requires a board to consist of at least 3 directors at all times. 

Officers are typically directors or key employees who are assigned additional, specific duties.  These duties should be set forth in the bylaws.  The TNCA requires each nonprofit to have at least a President and a Secretary.  Most boards will also include a Vice-President and a Treasurer.  Tennessee law does not dictate the duties of the officers; however, in general terms, most nonprofits define their duties as follows:

President – to lead and serve as the chief representative of the board, to ensure compliance with all laws and bylaws, and to conduct all meetings.

Vice-President – to assume the duties of the President when he/she is unavailable

Treasurer – to oversee all the finances of the organization

Secretary – to prepare minutes and maintain all records of the nonprofit

The same fiduciary duties that apply to directors – Duty of Care and Loyalty – also apply separately to the specific responsibilities of each officer.  For example, a treasurer is under the same Duty of Care standard in how she oversees the nonprofit’s bank transactions, and a failure to meet this standard is a breach that can create personal liability.