Do Charities Have Limited Liability?

Charities are organized to fulfill a service mission. Most charities operate as corporations, but some may operate as trusts or associations, each of which is a type of separate legal entity. Charities do not have owners. Instead, they have founders, are run by a board of directors, and are managed by one or more managers who may be the founder. Because charities are separate entities, they do offer limited liability protection.

Charities are not-for-profit enterprises. Charities are classified as tax exempt under section 501(c)(3) of the Internal Revenue Code. They range from charitable hospitals to churches to providers of housing and services. Charities are organized to benefit the public good or a particular group of people, not to benefit owners. The IRS mandates that any organization that seeks tax exempt status as a charitable organization must be organized as a corporation, trust or association.

Since charities, as nonprofits, have no shareholders or owners, the vast majority that are organized as corporations are sometimes referred to as non-shareholder corporations. The money that a charity earns, its “profits,” are recycled back into the charity's operations. They are not distributed to any owners because there are no owners. Since charities are mission-driven and not profit-driven, charities have similar and dissimilar business liability issues from for-profits. There are no owners' assets to protect. Instead, there are directors, managers and employees.

Regular for-profit corporations shield their owners' personal assets from liability. Generally, the actions of members of the board of directors and other officers of a corporation are shielded by corporate or trust structure -- although an irate donor or legal authority conceivably could sue directors and officers, alleging breach of fiduciary duty, which is the duty to act in the best economic and overall interest of the charity. Since the money charities receive often place restrictions on usage, the charity may not be able to use its corporate funds to defend a lawsuit against the directors and officers. Therefore, charities typically purchase director and officer, or D&O, insurance to protect their board members' personal financial interests from obligations arising from their work on behalf of the charity.

Charities typically maintain general liability insurance and may purchase other types of business insurance in support of their operations. Although real-estate or other asset-based charities, including housing providers, may own significant assets, many charities do not. With restricted funding from grants and donations, a charity often does not have the assets and operating cash flow to defend itself against lawsuits or other disputes. Therefore, charities lessen the risk of business failure and protect its managers and employees by maintaining liability insurance.