One of the most distinct differences between a nonprofit and a business is that a nonprofit does not operate intending to make surplus money, apart from what is needed to fund their cause and pay their expenses, such as salaries and overheads.
While a nonprofit solely functions for the betterment of communities and societies through money contributed by nonprofit donors and funds, similar to corporations, nonprofit charities enjoy the privileges of limited liability.
Whether you are a nonprofit finding individual donors to support your cause, an individual seeking volunteer opportunities or simply looking to find a charity to donate to, it is important to know the legal responsibilities of the nonprofit you are working for or supporting.
What Is a Liability?
Liability refers to the financial obligations of a business or organisation. It’s a claim on an organisation’s assets because of debt.
What is Limited Liability?
Limited liability is a condition that states that the losses or debts that an owner, founder or shareholders of a business or organisation incurs do not extend to their personal assets. It’s a legal relationship that separates the owner of the entity from the entity itself.
Do Nonprofits Have Limited Liability?
Nonprofit organisations that work towards furthering their mission have limited liability, so in the case of debt overload or failure of payment, the nonprofit board of trustees and or directors will not be personally liable for the debts and obligations of the charity. In case the charity cannot pay back bank loans, payroll and other accounts payable, the creditors would seize only the charity’s assets while the personal property and assets of the board members will not be affected and cannot be claimed.
Are All Nonprofits Limited Liability?
Not every charity or nonprofit organisation has limited liability as it’s granted, depending on the size and the functions of a charity. I.e. a small group of people gathering together to feed the homeless who aren’t legally registered as a charity it won’t have limited liability status.
Advantages of Limited Liability
- Organisations with limited liability have fewer regulations and compliance requirements than general partnerships, corporations and proprietorships.
- A limited liability can have an unlimited number of members who are individuals and/or trusts and corporations.
- Members, board of directors and trustees are protected from personal liability as creditors can’t seize any personal assets such as houses, cars and savings accounts.
- Efficient management structure. Members, not the owners or founders of the nonprofit, usually manage limited liability organisations.
Disadvantages of Limited Liability
- Maintaining a limited liability organisation usually costs more than general partnerships.
- Difficulties in ownership transfer. In a limited liability organisation, all members must agree on adding new members or to altering ownership.