Exceptions to the limited liability clause | start nonprofit organization

Exceptions to the limited liability clause

in Incorporation

One of the most important benefit of Incorporation is that, its protects the individual members from being held personally liable for the the liabilities of the corporation.
However in a few situations, Individuals involved with an incorporated nonprofit organization may be held personally liable for the liabilities of the organization. It is therefore imperative for you to know these exceptions before you start a non profit.
The situations in which Individuals may be held personally liable include -
1) Non payment of taxes/ Non filing of tax return – An organization that has obtained 501 (c) (3)tax exemption from the IRS does not have to pay taxes. However the organization is still required to file periodical tax returns.A non profit organization that has not obtained 501(c)(3) exemption must file returns as well as pay taxes to the federal and the state authorities.
A board member or any other individual who has been entrusted with the responsibly to pay taxes by the organization is supposed to act diligently in this situation. However if the individual fails to report or pay taxes, he is held personally liable for any unpaid taxes, penalty there upon or interests payable for delay in payment or delay in filing of returns.

2) Non compliance of other statutory requirements – An individual may also be held personally liable, if he is duly authorized by the organization to act on its behalf and still fails to comply on issues like -
  • Filing of Annual report with the Secretary of state
  • Filing of Annual report with the State Attorney general
  • Paying of employee withholding tax
  • Paying of unrelated business Income tax.......
4)Piercing the Corporate veil- If a individual is found to be misusing the corporate veil to misappropriate funds, he/she may be held personally liable. In legal parlance, this is called – ‘Piercing the corporate veil’. The corporate veil may be pierced if the personal funds and corporate funds are so intermingled so as to deliberately misuse the limited liability clause for personal gains.....
5) Private foundations – If an organization is classified as a private foundation (as per its IRS classification), its members can be held personally liable for failing to file federal or state tax returns or for failure to pay excise tax on certain specifically prohibited transaction. (Please refer to IRS manual on Private foundations)