[Updated 2025] Many board members and leaders of nonprofits are worried about making decisions that could go against the rules in their articles of incorporation or bylaws. If a group does something that isn’t allowed by law, it could lose its tax-exempt status or face lawsuits, fines, and bad press.
“Ultra vires” means doing something that a group is not legally allowed to do. This means doing something that the company’s charter or other governing documents don’t allow. Following these rules helps nonprofits keep their members’ trust and stay out of trouble with the law.
This blog will use simple language and real-life examples from nonprofit corporations to explain what ultra vires acts are. You will also learn why it is important for good corporate governance to follow your articles of incorporation.
Get ready to learn how following the rules can keep your business—and you as a director—safe from big risks.
Important Points
When a nonprofit or government group does something that isn’t allowed by its articles of incorporation, bylaws, or legal authority, it’s called an ultra vires act. The IRS says that a 501(c)(3) charity can’t support political candidates, which is one example.
These things can make things very bad. If a nonprofit does something that isn’t allowed by its corporate charter or objects clause, it could lose its tax-exempt status, be fined, sued, or publicly criticized.
Board members who agree to ultra vires actions could be held personally liable. D&O (Directors and Officers) insurance usually won’t pay for claims made because of these actions. The people involved may have to pay for damages out of their own pockets.
Derivative suits let directors or voting members sue people who do things that are outside the scope of their duties and hurt the nonprofit. This helps keep the organization’s rights and mission safe.
Following the rules set out in your articles of incorporation and bylaws will keep your team safe from these problems. Regularly going over the rules stops mistakes that can get you in trouble with the law and the IRS.
Ultra Vires Acts
When a business or government body does something that is outside of its legal authority, it is said to be “ultra vires.” This means that it is breaking the rules in its articles of incorporation or governing documents. If these groups don’t follow the rules set by their corporate charters or objects clauses, they could face legal trouble. This is true for both corporations, like property owners associations, and nonprofits.
Definition
“Ultra vires” means “outside of the powers.” In corporate law, this term refers to actions that are not allowed by articles of incorporation or other governing documents.
A nonprofit’s corporate charter or objects clause tells it what it can and can’t do. Ultra vires acts are what directors or officers do that goes beyond their authority.
Board approval can’t fix these actions later. Since the late 20th century, a lot of states have gotten rid of this rule for regular businesses. However, tax-exempt nonprofits still have to follow it closely under administrative law.
The next part talks about how these rules really work for tax-exempt groups and nonprofits.
Application to tax-exempt nonprofits
Nonprofits that don’t have to pay taxes must follow the rules set out in their articles of incorporation and other governing documents. To keep tax-exempt status under federal law, the IRS needs this. If a nonprofit does things that are outside of its legal authority, which are called ultra vires acts, it could lose its tax-exempt status.
Even if they mean well, charities and other nonprofits can’t go over these limits.
For instance, a group that is only for education cannot use its money for political campaigns or to make money. This is against corporate law and will get you in trouble with the IRS. This could also lead to judicial review or lawsuits by voting members or directors through derivative suits.
Following the rules strictly protects both the organization and its leaders from legal problems and personal responsibility under tort laws or corporate governance policies.
Example of Ultra Vires Acts
A political candidate is supported by a 501(c)(3) non-profit group. This action is against the law in the United States and goes against the company’s articles of incorporation. The IRS calls this an ultra vires act, which means the group is going beyond what is allowed by law or its corporate charter.
Any contract that is linked to the endorsement may no longer be valid. Board members who let these kinds of things happen could be personally liable under US constitutional law. The case of Hammersmith and Fulham London Borough Council v. Hazell also showed that government bodies and charities can face serious legal consequences for actions that are not legal.
Risks And Complications
Tax-exempt nonprofits and their directors can face serious legal problems if they do things that are outside of their powers. Contracts that the nonprofit isn’t allowed to make or that aren’t allowed by its articles of incorporation may not be valid or enforceable.
If an agreement is canceled because of ultra vires actions, partners who work with the nonprofit could lose money or have to deal with disagreements.
Nonprofits that do these things are often under more scrutiny from government agencies and regulators because they have to follow their corporate charter and other rules. Directors could be held personally responsible, which would put their own money at risk.
More lawsuits and a loss of trust also put the organization’s operations at risk, especially when rules under UK constitutional law are broken or public policy is ignored.
D&O insurance might not cover claims related to these illegal acts, which means that both the nonprofit and the people involved would not be protected if something goes wrong.
Breach of Fiduciary Duties
Fiduciaries must be careful and follow the nonprofit’s articles of incorporation, bylaws, and legal authority. Find out how not doing these things can put you in danger.
Duty Of Care and Obedience
Directors of tax-exempt nonprofits have to do their duty of care and obedience. This means that you should always follow the group’s articles of incorporation, bylaws, and other governing documents and make smart decisions for the group.
For instance, a director can’t give the go-ahead for something that the nonprofit isn’t allowed to do by law or by its corporate charter. If you don’t follow these rules, you could do things that are outside of your powers, which could put both the organization and the board members in danger.
Obedience also means following the rules set by the government or relevant laws, like in the case of Anisminic v. Foreign Compensation Commission.
If directors don’t follow these rules, they could be personally liable if they break their fiduciary duties or go against intra vires limits. This careful attention is necessary for good corporate governance. If directors don’t pay attention, voting members or even other board members can sue them.
Next, we’ll talk about how derivative lawsuits work when they target third parties who are connected to ultra vires acts.
Personal liability risks
Board members are less likely to be held personally responsible for mistakes if they act in good faith and do their fiduciary duties. The law protects them in most states as long as they follow the articles of incorporation and other rules.
When someone breaks the corporate charter or the law, things change. If a director doesn’t follow the rules or the law, insurance may not cover them. This could lead to lawsuits against that person for damage caused by ultra vires acts, like the ones in Council of Civil Service Unions v. Minister for the Civil Service.
Tax-exempt nonprofits may stop paying for damages after such breaches, which makes the risks even higher.
Derivative Lawsuits
A derivative suit lets directors or voting members use the court system to deal with damage done to their nonprofit. Find out how these lawsuits protect groups and who they may go after.
Lawsuits Brought by Directors or Voting Members
Directors or voting members can sue on behalf of the company. These are known as derivative suits. If the board members don’t get along or if the leaders don’t follow the company’s charter or articles of incorporation, these kinds of things could happen.
In most cases, the goal is to stop ultra vires acts and protect the interests of the tax-exempt nonprofit.
These kinds of lawsuits help protect people’s rights under public policy rules and governing documents. If someone breaks their fiduciary duty or does something that is not allowed by the law set by the government or the Irish Constitution, stakeholders can use this tool to step in.
If necessary, similar lawsuits let you go after third parties who were involved in the wrong behavior next.
Targeting third parties
Derivative lawsuits can target third parties, like insiders or other directors, who did things that were not allowed by law. People who were supposed to take care of the nonprofit often hurt it in these cases.
For instance, a director might use company money for their own benefit, which would be against the rules in the articles of incorporation or corporate charter. Suits help make these people responsible and push for good corporate governance.
People who do things that go against governing documents or public policy could face legal action. Tax-exempt nonprofits are at a higher risk if someone breaks their memorandum and articles of association or goes ultra vires.
Derivative lawsuits protect the business from harm caused by anyone acting without permission or against its best interests, even if those people are employees of the company.
When Insurance Doesn’t Cover You
Some Directors and Officers insurance policies may not cover damages caused by ultra vires acts. Read on to find out how your legal authority, articles of incorporation, or corporate charter could affect this.
What D&O insurance does not cover
Most of the time, directors and officers insurance policies won’t cover ultra vires acts. This means that these policies won’t cover claims that are based on actions that a director isn’t allowed to take by law or the articles of incorporation.
Board members are personally liable if they go outside the rules set out in the company’s charter or other governing documents. The policy language makes these limits clear, so there is no doubt for tax-exempt nonprofit officers and directors.
There is no safety net for claims that have to do with government bodies or nonprofit leaders making decisions without permission. Losses are directly borne by those engaged in the ultra vires acts, as D&O coverage is inapplicable in this context.
These holes in protection make it even more important for directors and officers to follow all the rules set by public policy and the founding documents of their own organizations. The fact that the company can’t protect itself from lawsuits makes things even riskier. This could lead to lawsuits for breach of fiduciary duty next.
Not being able to get corporate indemnification
Some ultra vires acts are not covered by D&O insurance and do not qualify for corporate indemnification. Legal authority is clear: if an act is not in the company’s articles of incorporation or governing documents, corporate indemnification does not protect officers or directors.
This is also true for charities. If a nonprofit board agrees to spend money in a way that goes against their corporate charter, the people involved are personally responsible.
When government agencies or tax-exempt nonprofits do things that aren’t allowed by public policy, the risk to individuals goes up. Because they aren’t getting paid back, these people may have to pay for damages and legal fees out of their own pockets.
The rules are meant to stop people from acting without permission by making them accountable for decisions they make without permission under both state law and the Irish constitution.
Why Compliance Is Important
It is the legal and moral duty of directors to follow the articles of incorporation, bylaws, and other governing documents. If directors don’t follow these rules, they could be personally liable and lose their tax-exempt status with the IRS and other government agencies.
Legal authority is contingent upon rigorous adherence to corporate governance standards.
Following public policy and the rules of the organization protects the mission and reputation of any nonprofit group. Not following the rules could lead to big fines or even loss of trust.
Keeping an organization strong, trusted, and focused on its goals requires constant attention to the law.
Conclusion
Tax-exempt groups can be in danger from ultra vires acts. Following the rules set out in the articles of incorporation and bylaws keeps the nonprofit and its leaders out of trouble.
Reading governing documents and following clear rules are easy ways to avoid making expensive mistakes or getting sued for actions that go beyond the law. These tips are useful for all government agencies and charities that want to improve their corporate governance.
Many state charity offices offer free guides on how to follow the law if you need more help. Staying alert keeps your team safe… Do little things today to feel better tomorrow! I once saw a local group solve big problems just by reading their charter together. Sometimes the simplest solutions are the best.
Questions and Answers
1. In corporate governance, what does ultra vires mean?
Ultra vires means doing things that are not allowed by the articles of incorporation or the law. In corporate governance, it means doing things that aren’t allowed by the company’s founding documents.
2. Can government agencies do things that are ultra vires?
Yes, government bodies can also do things that are not within their legal authority. Ultra vires acts are things that people do that are not allowed by law.
3. What are some actions that are ultra vires?
One example is a city council spending money on projects that the law doesn’t allow. A company making deals that aren’t allowed by its articles of incorporation is another example.
4. Are there legal consequences for an ultra vires act?
Yes, there can be legal consequences for someone who does something ultra vires. Courts can throw out these actions, and depending on the situation and local laws about intra vires and ultra vires decisions, the people involved may have to pay fines.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at info@caritaslawgroup.com.
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