Nonprofit organizations in Germany are fulfilling an ever increasing number and variety of tasks. As a consequence, the persons responsible are exposed to higher requirements and liability risks. Today, many charities are running commercial businesses (related or unrelated to their charitable purposes) with large numbers of employees and budgets in the millions. They have evolved into NPO groups with several service and subsidiary companies, or manage triple-digit or even larger multi-million dollar assets as a foundation.
This kind of activities also entails liability risks that are sometimes difficult to overlook by the board members, members of the executive boards and/or managing directors, who are sometimes even working in an honorary capacity.
During their day-to-day business operations, the board members and other persons acting on behalf of the nonprofit organization, like managing directors or project leaders, can trigger liability claims from members of the association or third parties either against the organization or against these people themselves. Claims of the nonprofit organization against the persons acting on its behalf are also conceivable.
Since every organization is different and the risks for liability cases are correspondingly different, the persons in charge first need to identify the liability risks pertaining to the specific organization's work and which cases can result in a personal liability involving their private assets.
Typical examples of liability scenarios
Due to their demanding tasks, especially the board members of charitable associations will have to address potential liability risks, whether of a fiscal nature or not. Still many board members are working in an honorary capacity and often fail to see personal liability risks and their implications. For example, the association's board of directors is responsible for fulfilling the association's fiscal obligations, including the record-keeping for tax purposes. In the event of tax arrears, the tax office may hold the association's board of directors liable. The same applies to unpaid social security contributions, e.g. due to an unjustified classification of an employee as a non-dependent freelancer. In addition, articles of association of many associations contain numerous potential pitfalls that could lead to liability claims.
In charitable foundations with large assets, the board of directors is threatened with liability especially if the assets melt away due to a distortion on the capital markets. It is then of central importance that the board of directors can prove that it has made its investment decisions in a well-considered manner and in accordance with the statutes and, if applicable, the investment guidelines.
In charitable LLCs, liability risks can, for example, be triggered whenever the managing director has taken measures that cause financial damage to the company (e.g. concluded a contract that is unfavorable to the company; paid disproportionately high remuneration to third parties or employees; jeopardized the tax-exempt status of the organization; etc.).
The liability of an organization and its management bodies cannot be completely excluded. However, it may be effectively minimized by designing the organization's statutes and bylaws in a way providing legal security. In particular, provisions in the bylaws that contain imprecise or no provisions at all on the remuneration of executive board members are frequently encountered. They require review and, if necessary, revision, as do provisions in the bylaws that directly regulate the liability of those responsible. Other important measures may include a careful examination and formulation of the staff and directors' employment contracts and a well thought-out reorganization of the NPO.
In addition, any expense allowances paid to the board members or other staff of the association need to be checked for their classification under German social security law to avoid any liability claims from social insurance agencies. For associations performing extensive activities in business activities related and/or unrelated to their charitable purposes, it may also be expedient to define responsibilities and, hence, the liability of the board members by clearly allocating areas of responsibility. Those areas that may present liability risks for the association can be outsourced to a subsidiary limited liability company under German law (GmbH) so as to relieve the board from its management responsibility in this regard.
In addition, the bookkeeping and tax advice should be left to experienced experts who specialize in the fiscal particularities of nonprofit organizations and are able to identify potential risks at an early stage.
All in all, there are numerous risks involved. It is therefore crucial that the organization takes the issue of compliance seriously and implements a suitable compliance management system.
As nonprofit compliance experts, we will be very pleased to assist you in examining potential liability risks. We optimize your statutes including your bylaws and other codes of your organization and support your organization's reorganization. We know what aspects of tax law, nonprofit law, corporate law, labor law, social security law and others deserve special attention.
As one of the leading law and tax firms in the field of nonprofit law, we can also assist you with ongoing accounting and tax advice (including annual financial statements, tax returns, payroll, etc.) in order to minimize the liability risks of your organization in this respect as well.
Do you have any questions relating to the liability of nonprofit organizations or wish to know how you, in your capacity as member of a board or a managing director, may be held liable? Has anyone sued you or your organization for damages yet? Our attorneys for any questions relating to nonprofit law, association law and on how to avoid liability risks are happy to assist.
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