A nonprofit director is a fiduciary: someone trusted to act for the organization, not for themselves. Most state guides describe that trust as three duties: care, loyalty and obedience. Some name only two. The state statutes we read set a single standard instead: act in good faith, with the care an ordinarily prudent person would use. This article explains each duty and what the sources say. It is general education, not legal advice, and state law varies.
What are the three duties?
| Duty | What it asks | Examples from the guides | Who names it |
|---|---|---|---|
| Care | Be informed and use good judgment | Read materials before meetings, ask questions and keep written minutes | Minnesota, New York, Washington, California and BoardSource |
| Loyalty | Put the organization first | Disclose conflicts, follow a written conflict policy and never use the organization’s information for yourself | All of them, and the IRS |
| Obedience | Stay faithful to the mission, the governing documents and the law | Use funds for lawful purposes and meet tax and financial reporting deadlines | Minnesota, New York, Washington and BoardSource. California does not use the term |
A New York law firm outline notes that not all authorities recognize obedience as a separate legal duty.
What is the duty of care?
The duty of care is about how you do the job. The Minnesota Attorney General describes it as the care an ordinarily prudent person in a like position would exercise, and gives examples: “reading and evaluating all materials received in advance of meetings” and “asking questions to obtain information necessary to make informed decisions.” California’s attorney general guide says a director should not be afraid to ask questions at board meetings and should review financial reports.
Minnesota’s statute says a director who is present at a meeting is presumed to have assented to the action unless they vote against it. Washington’s quick guide says the minutes will normally record objections to create a record of the dissent. If you disagree, vote no or abstain and ask that your position be recorded.
Can you rely on staff, accountants and lawyers?
Yes, in good faith. Minnesota’s statute says a director is entitled to rely on information, opinions, reports or statements, including financial statements, prepared by people the director reasonably believes are reliable and competent. That does not apply if the director has actual knowledge that makes reliance unwarranted. California’s guide adds that directors should use their own judgment in voting and not simply follow the lead of others.
What is the duty of loyalty?
Minnesota’s guide says directors have “an absolute duty of complete, undivided loyalty to the organization.” Conflicts happen. It says a conflict arises when the nonprofit deals with a director, a director’s family member or an organization in which the director has a material financial interest, and that boards should have a written conflict of interest policy. Such a deal may still be allowed if it was fair, fully disclosed and approved in good faith by directors who have no interest in it.
What does the IRS add on pay and insider deals?
Federal tax law has its own rule for transactions that benefit insiders. Under Internal Revenue Code section 4958, a person who gets an excess benefit owes a tax of 25 percent of it, and 200 percent more if it is not corrected. A board member who knowingly approves the transaction can owe 10 percent of the excess benefit, with a cap of $20,000 per transaction, unless the participation was not willful and was due to reasonable cause.
The regulations give boards a way to show pay was reasonable. Treasury Regulation 53.4958-6 presumes a payment is reasonable if three things are true: an authorized body made up of people without a conflict approved it in advance, that body obtained and relied on appropriate comparability data, and it documented the basis for its decision at the same time. The conflicted person may answer questions but leaves before the vote.
What is the duty of obedience?
Obedience means faithfulness to the mission, the governing documents and the law. Minnesota’s guide says directors should ensure funds are used for lawful purposes, be familiar with state and federal laws for nonprofits and meet deadlines for tax and financial reporting. The New York guide says to check that the organization complies with applicable laws and regulations, its mission and its internal governance documents. Washington’s guide describes it as being faithful to the organization’s mission.
Are unpaid directors protected from lawsuits?
Partly. The federal Volunteer Protection Act says no volunteer of a nonprofit is liable for harm caused by an act or omission on its behalf if the volunteer was acting within the scope of their responsibilities and the harm was not caused by willful or criminal misconduct, gross negligence or reckless misconduct, among other conditions. The Act has exceptions, and it does not affect a civil action brought by the nonprofit itself. States can add their own conditions and protections.
California’s attorney general says volunteer directors are protected from liability for negligence claims in some cases, but not in lawsuits brought by the Attorney General. Under the Act, a volunteer includes a director who receives no more than $500 a year in compensation.
What if a decision turns out badly?
Minnesota’s statute says a director who performs their duties in good faith, with the required care, is not liable by reason of being a director. Some courts also apply the business judgment rule to nonprofit directors. Two New York law-firm sources describe it that way, while the attorney general guides we read do not use the term. Ask your attorney how your state treats it.
What does Form 990 ask about governance?
Form 990 does not name the three duties. Part VI asks whether the board has independent members, whether it documents its meetings, whether every board member received a copy of the return and whether policies such as a conflict of interest policy exist. For a checklist of what to ask for when you join, see our nonprofit board orientation checklist.
Where Board Director Institute fits
BDI’s Nonprofit Board Fundamentals ($197) covers the duties of care, loyalty and obedience in plain language with realistic board situations, and ends with a 30-question assessment (24 correct to pass). Nonprofit Board Governance ($697) goes deeper on tax status and insiders. Neither is legal advice, and state law and your organization’s own documents can change the answer. The video and voice in BDI courses use an AI-generated version of Michael Barrick, who reviewed and approved the lessons.