Serving on a nonprofit board is supposed to be a good deed — but a director who profits from a deal with the organization can lose the liability shield entirely and pay personally.

QIM 34 | Nonprofit Law | Law Desk

Ava: Michael, most people join a nonprofit board to do good, not to get sued. When can a board member actually be held personally liable?

Michael Benavides, Esq.: The starting point is that directors owe real duties. Under Corporations Code section 5231, a nonprofit director has a duty of care — act in good faith, in what you reasonably believe is the organization's best interest, with the care a prudent person would use, including reasonable inquiry — and a duty of loyalty, meaning you put the organization ahead of yourself. A director who does their homework and acts in good faith is generally protected, even if a decision turns out badly.

Ava: So where does the protection fall apart?

Michael Benavides, Esq.: Self-dealing. Under Corporations Code section 5233, a self-dealing transaction is one where the organization is a party and a director has a material financial interest — the director is on both sides of the deal. That's where the shield drops. If the transaction wasn't properly approved and validated the way the statute requires, the Attorney General can move to void the transaction and hold the director personally liable. And if there was fraud, it can open the door to punitive damages.

Ava: Give me a plain example of the danger zone.

Michael Benavides, Esq.: A director whose own company gets hired by the nonprofit, or who buys or leases property from it, or who steers a contract to a family business. None of those are automatically illegal — but they have to be handled exactly right: full disclosure of the interest, approval by the disinterested directors, a finding that the deal was fair and in the organization's best interest. Skip the process and you've handed the AG a case.

Ava: How does a conscientious board protect itself?

Michael Benavides, Esq.: Written conflict-of-interest policy, interested directors recusing and leaving the room, contemporaneous minutes documenting the disclosure and the fairness analysis, and independent proof the price was market. Honest caveat: whether a transaction is lawful self-dealing or an actionable breach is fact-specific and turns on the exact approvals and disclosures. But the rule of thumb is simple — if a director stands to profit, the board has to slow down and paper it correctly.

Talk it through with Law Desk. If you're a nonprofit director facing a conflict question — or an organization worried a past deal wasn't handled right — a California attorney can assess the exposure. Schedule a consultation with Michael Benavides, Esq.

Disclaimer

Attorney advertising. General information about California nonprofit law, not legal advice; reading it creates no attorney-client relationship. Director-liability questions are highly fact-specific and depend on disclosures and approvals; statutes change and are applied differently to different facts — confirm the current rules with a licensed California attorney before acting. Michael Benavides, Esq. — California State Bar No. 270714 — is the only licensed attorney and the source of every legal statement here. Ava Benavides is an editorial brand voice, not an attorney, and does not give legal advice in her own name.