This post describes how we are solving the problem of maintaining privacy for nonprofit directors with examples of the three methods that we are using now.
Most directors of nonprofit organizations serve as volunteers on a part time basis. They may only vaguely understand the legal implication of their role with the charity. It is safe to presume that none want to be named as defendant in a debt collection matter or legal claim in return for their charitable efforts. Yet we see a disturbing trend in this direction. Some caught in a mess by surprise wonder how this is even possible.
State and federal law generally requires the disclosure of the identity and addresses of directors of a nonprofit organization. It is generally not possible for the director of a nonprofit organization to be anonymous. The purpose of this requirement is to provide transparency and accountability to stakeholders, members, donors, and the general public. Nonprofit documents filed with government agencies list the names of their directors include the articles of incorporation, annual reports, and tax returns. These documents are available to the public and can be accessed through a variety of online databases.
When a nonprofit organization is involved in a lawsuit, the opposing party often names all the individual directors as defendants in the claim. There are even shady individuals who look for specific vulnerabilities of nonprofits and then stage an event that allows them to bring a lawsuit. ADA violation claim scams were popular a decade ago. We anticipate that new laws in some southern states like abortion laws, for example, will trigger new opportunities for opportunists to sue nonprofit organizations.
Unfortunately I recently went through this myself where the plaintiff (the State of New Jersey) listed as defendants the nonprofit corporation, it’s controller (me), individual board members and “John Doe, Jane Doe and ABC Corporation” to allow them to add additional defendants who were revealed later in discovery. Fortunately the charity won that case before I was required to reveal any additional information. But this experience triggered a number of directors to say that they would only offer service if their individual identities were not revealed.
Over the past few years, I’ve found three ways to effectively protect the privacy of individual nonprofit directors.
The first approach to a solution is simply to retitle the directors but allow the same powers. One nonprofit client uses a “Board of Advisers” with more regularity than its actual two named directors who primarily serve as figureheads.
The second is to use a business format that does not require disclosure. For example, another nonprofit client run by Hollywood celebrities who choose to remain anonymous utilize a name like “ABC Management Company” as director, where ABC Management Company is registered as an unincorporated association where only the organizer’s name is public.
The third approach is to utilize legal entities in states that require little disclosure of ownership. The phrase “nested LLCs” is gaining in discussions of privacy and liability management. I have not had any clients using this now but one client who runs a small charity is forming a second LLC in Wyoming for this purpose now.
This post does not consider the effect of insurance for nonprofit officers and directors that may reduce the ending financial liability result but does not impact the privacy issue or legal processes.
One final point: we do not expect that any of this is applicable when criminal violations are involved. The strategies are only intended for personal privacy and civil liability protection.
Of course, none of this is legal advice. It is simply an explanation of what we are doing to ensure privacy of directors.