I have been approached about joining the Board of Directors for a tourist railroad. I am curious about a few things though.

What kind of liability would one hold as a board member? What exposure does this open one up to.

I know many tourist railroads struggle to keep up their maintenance and be in 100% compliance. I have been working with this particular organization and we have made leaps and bounds forward with bringing equipment and track up to standards. We have a new wave of volunteers that care deeply about the RR and are trying very hard to better everything from equipment to track and operations to peoples attitudes. The ground gained in the last year or so has been incredible.

However, a recent conversation with a FRA inspector has got me having second thoughts about joining this board. It is a catch 22. If I join now, then it opens up more options for improvement from both sides. But until certain standards of operation are met, where does that place the liability in case of an accident.

Any input is appreciated!

1. Does the railroad have Directors and Officers (D&O) insurance?
2. What are the limits of the liability insurance coverage?
3. If the railroad is sued for a liability claim, you may be named in the suit under the theory of "deep pockets" where they name everyone possible, but most likely the liability policy with cover any claims.
4. Looking beyond the liability on the operating side, what governance policies does the board have in place? How does the board conduct its business?

Just a few conversation starters.

Wesley

*

Look, even my own NRHS Chapter has D&O insurance. I just signed the cheque today for another year's worth at $500 covering eight of us. Mind you, we no longer do big excursions like we did decades ago when Chessie and MARC were more accommodating, but we have a good chunk of change in the bank, and if we ever auctioned off the Library we share, well...........

A non profit that I was a director of got into a disagreement with the County over a property tax issue. The result was the organization ended having to pay a penalty of several thousand dollars. The state picked this up in a tax audit and said the penatily was a result of the directors making an error in judgement. The state said the directors were responsible for the penatily, not the non profit, and would have to pay ithe penatily out of their own pockets.

D and O insurance is great, but besure you know the limits and exclusions.

As you look at joining a board, look beyond the obvious safety issues that come to mind. I’d look at the business side, especially if this is a non-profit organization. Some states have enacted new regulations dealing with “charities” which tends to be the term used for a 501c in their state. Significant civil penalties ($10,000 and up) against the trustees themselves are described in some of these new regulations. Again, as stated earlier, look at the D&O policy carefully before accepting a board position and perhaps check with your home owners policy as well. Understand what you are covered for and look at the other trustees carefully. Are you comfortable with their role in the organization? Any concerns?

I should clarify that this a for profit, volunteer run organization. This is all very good info so far.

I agree with others who have mentioned discussing this with an attorney familiar with corporate law in your state. At a minimum, you should have him/her review the organization's bylaws, articles of incorporation and the D&O insurance policy because you may not be covered if someone else makes a mistake.

You may also want to get your own "umbrella" policy.

Bob H

I believe that if a non-profit fails to file a tax return with the IRS, and owes money, each and every director can be fined up to $20,000 per tax year of non-compliance. I expect the maximum fine only happens when there's serious wrong doing. I'm not a lawyer or tax accountant, so your mileage may vary.

-Mark

Correct me please, but if an organization is recognized by the IRS as a 501(c)(3) organization, would they ever have to pay taxes? If so, I'd curious to know how many do pay federal tax.

YES

It's called unrelated business income (UBI) and can be taxable and has to be reported on IRS form 990 T --- and some income tax may have to paid.

Without going into a lot of details, if a non profit has too much UBI, it can lose its non profit status.

Bob H

I love it! I new this would be a good starting point for info. I also had a feeling that there was more to it than I was told. Maybe some of the others don't know this stuff either. I have a feeling there are many others out there that, at first thought, don't think of a board of directors for a volunteer or non profit with the same considerations as a normal corporation.

Interesting. Railroad museums are one of the exact case studies on Travelers website:

https://www.travelers.com/business-insu ... ility.aspx

This thread is brought to you by the term "Corporate Veil".

First, contemplate the consequences of you NOT running. Sometimes you really are the best man for the job and passing means someone much worse gets elected. On the other hand, if your plan to simply "yes-man" whoever you consider to be the Fearless Leader, then you're the much-worse guy.

Here are some "every board member should know" basics that are actually underneath the question you are asking. I find the vast majority of volunteer directors can learn more in these areas.

1. Your nonprofit must by law be a regular corporation. What is a corporation, specifically? And I love this video because it's quaint and fun, sorry if it is too long. https://www.youtube.com/watch?v=LNkuWBvZ1E4

2. Read your organization's Articles. This is had from your state's corporate licensing website. Articles are public in most states.

3. Read your organization's Bylaws. Obtained from your organization and by law it is a public document, IRS likes to see it on your website. This is a good "litmus test"; if the organization is uncomfortable letting you see it, red flag!!!

You oughta read these things anyway, but you're looking for an indemnity clause where the organization pays personal legal costs of directors. Of course that is only as good as the railroad's ability to pay. I'll talk about that at #7.


Sure. But it's hard to go by what the creditor says, because creditors often lie or mislead - anything to get your pen on your checkbook. The laws which protect consumers don't apply in the corporate world where you're expected to be savvy and have counsel.

4. The corporate veil is very durable and cannot be easily pierced. Generally certain specific blunders must be made. You should know them. It's like a "memory checklist" for directors. Cheers to Superheater for posting some good resources, see also http://en.wikipedia.org/wiki/Piercing_t ... orate_veil

It should be noted that the State confers the corporate veil to promote business. That is how in Dave's case they could notch out an exception for themselves.


5. You want (for you) asset protection. This should be in the vocabulary of anyone who's a director. I'm told Adkisson/Riser is the canonical book on the subject, maybe a lawyer can recommend a better one.
http://www.amazon.com/dp/0071432167/?tag=wolfharper-20
http://www.assetprotectionbook.com

6. I agree, ask about the D&O insurance. It's easier to get before you're sued. I was asked to run for a Board and said "you really oughta get D&O insurance now, before something happens." Within a month, by golly…

7. REVENUE. Most rail museums I know have shockingly underdeveloped revenue streams* and undermaintained track. When you figure for that deferred maintenance, you could call them insolvent. Most of the business risks flow from this. The single best defense is revenue, or as a small computer dealer once said, "An Apple a day keeps the sheriff away." Do WHATEVER it takes to double passenger revenue.

* just look at the way Catskill Mountain grew their business exponentially in the last 2 years when they really needed to. And I haven't seen too many museums that couldn't at least double ridership with the right marketing effort.

The things I mention in 3, 4, 5 and 6 - these things are not substitutes for each other. They each protect in different ways. Do them all but firstly #4 and then #6. "Own" these duties like it's personal, especially because it is with #4 and #5.

I am trying to fill you with the confidence that, if you give proper attention to these, your organization will be able to protect you. The best defense is a good offense - appropriate attention to the above.

There are those who sell a Board seat as a reward for high rank gained. Nope, it's a job role that like any other, requires certain skills. Don't be surprised if most of your board members shirk this or "just coast along" and the temptation may be to do the same. That's how nonprofits get in trouble.





Tall tales get taller with every retelling, eh?

Here's how deep the rabbit hole goes. IRS does not go after directors personally for the $20/day fine for filing your Form 990s late, which caps out at $10,000 for all years in aggregate. Anyway IRS has other recourses for nonprofits who simply don't file. (now you'll want a CPA at this point, and I'm not recommending this), but -- if your organization is too destitute to pay this, the cheap way out is continue to not file your tax returns. After 3 years your 501c3 status will be automatically revoked. Guess what this does. It resets the fine to zero :) Now reapply and and ask for retroactive reinstatement. You'll have a 1 year window-of-suck while your application is in the queue, then you're back.

IRS started automatic revocations saying "retroactive reinstatement would be the exception, not the rule". That didn't work out, they were overwhelmed with hundreds of thousands of small nonprofits whose all-volunteer Boards simply dropped the ball. So they lowered the bar greatly. If they don't grant it for you, you'll be a for-profit business from the date of revocation to the postmark date of reapplication. You can check the former on IRS's website so have the latter ready to go.
http://www.irs.gov/Charities-&-Non-Prof ... -Exemption

Of course if you're doing fraud or other evil, all bets are off.


That would take so much UBI that you would have effectively abandoned your nonprofit purpose, and it would be quite right to lose your status. Even then you can avoid this by spinning the UB into a subsidiary.

There are two ways your UB can pay taxes.

1. Corporation style. It's a true subsidiary. Last name Incorporated. It is a separate legal person and files and pays its own income tax on Form 1120. Then, it pays dividends to its shareholder, the nonprofit. Dividends are excluded from UBI (as discussed in Pub. 598.) Which means the nonprofit simply has a nice investment portfolio. This is a safe way for a nonprofit to have a for-profit subsidiary.

2. Pass-Through style. That's what happens if you don't form a corporation. LLCs also default to this. In this case, all revenue and expense would "pass through" onto the nonprofit's Form 990 as one of its activities. Income tax is paid as UBI Tax on Form 990-T. This would have the effects which concern you.

Now an LLC is bitaxual. It grants the liability shield of a corporation. For taxes, it can go either way - it defaults to "pass-through" but can later elect "corporate style" taxation. It's a good structure for a UB venture that you don't know if it'll be big enough to justify all the paperwork of a corporation.

The usual railroad museum mistake I see, is believing income is UBI when it either isn't; or is but is exempt. Read Pub. 598 and supporting docs.

Robert, I'm sure your info is correct as far as it goes, but you are also directly contradicting my attorney and the IRS publication that he had me read.

This was about three years ago and I don't remember the exact IRS publication.

My situation was that I became president of a non-rail preservation 501(c)3 organization that had had a defective treasurer in the past. This organization had put on a large annual conference on a one-time basis. The cash flow through the organization was on the order of $900,00 over a period of 5 years. Except for poor record keeping, defective accounting and a failure to file tax returns, there was nothing illegal involved. There was not a lot of unrelated business income.

The defective treasurer served for about 12 years without all their incompetence coming to light. Unfortunately quotes for professional accountants to straighten out the mess exceeded the organizations assets. It's taken a team of three volunteers three years to recreate all the accounting and missing tax returns. We have been fortunate to have two professional tax attorneys volunteer their services pro bono to help with the filing.

It's been six months since the filing, but the part of the IRS that deals with this kind of situation is so far behind that it could be another 12 months before we learn what the penalties will be. I'm hoping they don't exceed the organizations assets. After that we ask them to waive penalties on the condition that the organization disband and donate all assets according to law and bylaws to organizations with a similar mission.

I'm don't expect to be personally fined by the IRS. I believe that a $20K per year exposure is for circumstances involving fraud. But this thread is about exposure. If you don't know what you're getting into you could be getting involved with an organization that committed fraud. Try to find out before hand that tax filings are current and correct.

Call it a tall tale if you like, it's been an unpleasant personal experience for me.

-Mark