Nonprofit organizations are companies created for a purpose other than generating profit. Like their for-profit counterparts, nonprofits are subject to the laws of the state where they are formed.
In Michigan, specific rules apply to the group overseeing the running of the nonprofit, referred to as the board of directors. Understanding the legal requirements for a nonprofit board as well as the duties required of individual directors will help ensure that your organization stays compliant in Michigan.
Role of the Board
The purpose of a board of directors in a nonprofit business is to manage and promote the effective operation of the organization. To that end, the board's duties may include defining the mission of the nonprofit, planning the budget and handling other financial matters, and overseeing management. Board members do not directly manage the staff, as staff management is instead delegated to corporate officers, such as the president, secretary and treasurer. The board then takes action where necessary based on feedback from the officers in an effort to ensure that both short-term and long-term objectives are being achieved in a manner consistent with the mission of the nonprofit.
Composition of the Board
In Michigan, a nonprofit is required to have at least three directors. The directors do not need to live in the state. The director's term of service on the board, as well as the procedure for his appointment and removal, is not outlined in state law and is instead determined by the nonprofit's corporate bylaws. The bylaws are an internal set of rules and procedures that govern the operation of the business. However, there is no set form for bylaws under Michigan law. Further, bylaws are not filed with the state and are instead kept on file at the nonprofit's principle place of business.
Duties of Directors
Under Michigan law, every board member must adhere to the highest standards of care and loyalty. These standards are collectively referred to as the fiduciary duty, which is owed to the nonprofit and means that a director must act honesty and fairly in all corporate transactions. In evaluating whether the duty has been breached, state law utilizes what is known as the reasonable person standard, which asks whether the director used practical judgment and common sense in discharging his duties. Michigan law also requires a director to place the interests of the nonprofit above his own and avoid conflicts of interest. For example, if a director owned a private construction company, an issue may arise if the nonprofit was interested in using the company to build a second office. Under state law, such transactions are considered revocable by the nonprofit unless the director abstains from voting and the transaction is approved after full disclosure of the conflict, or the director can prove that the transaction was fair and reasonable at the time it was authorized.
If a board member breaches his fiduciary duty to the nonprofit, an action may be brought against the director by the state Attorney General or an individual connected to the nonprofit, such as another board member, officer or shareholder. Financial liability can be imposed on the director for any losses associated with the breach. In addition, directors can be held individually civilly and criminally liable for casting a vote in favor of any corporate action that violates state or federal law. Further, under Michigan law, it is considered a misdemeanor for a director to knowingly falsify or alter a nonprofit's books, records or accounts. The state may also impose fines for these violations.
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