If the directors of a nonprofit corporation decide to dissolve it, they must pay off all debts and obligations of the nonprofit and distribute all of its assets to another tax-exempt nonprofit corporation.
Forming a nonprofit corporation generally protects the directors, officers and members of the nonprofit from personal liability for the corporation’s debts and other obligations. Only the assets of the corporation may be used to pay off debts and other liabilities. This protection from having personal assets available to pay off debts or judgments is called “limited liability”. In a few situations, people involved with a nonprofit corporation can be held personally liable for its debts. A director or officer of a nonprofit corporation can be held personally liable if she:
- personally and directly injures someone;
- personally guarantees a bank loan or a business debt on which the corporation defaults;
- fails to deposit taxes or file any necessary tax returns;
- does something intentionally fraudulent, illegal or clearly wrong-headed that causes harm; or
- co-mingles nonprofit and personal funds.
To safeguard against some of these exceptions, insurance is available to protect volunteer directors, who may be reluctant to serve without it.