3 Basic Steps to Reduce Personal Liability as an Org Leader
It’s come to my attention that many of the smaller EA orgs are not putting into place basic protection measures that keep their leaders safe. In the world we live in, risk mitigation and potential lawsuits are a fact of life, and I wouldn’t want anyone to put themselves at greater risk just because they are unaware of the risk and easy steps to avoid it.
Rule #1: Incorporate.
I know most are hesitant to start an actual non-profit since that is more expensive and time-consuming, but at the least, you can form an LLC. That means that any liability accrued by the org CANNOT pass on to you (I think there are a few exceptions, but you can research that). LLCs are easy to start, and are pretty inexpensive (a few hundred to start, and then annually).
Rule #2: Get your organization its own bank account
It is NOT a good idea to keep your organization’s finances together with your personal ones for many reasons. That increases the risk of accidental fraud and financial mismanagement. If you have your funds and the org’s funds together, you run the risk of using the wrong funds and increasing your liability, since it’s not clear which activities are personal (not protected by the LLC) or from the org. You also can’t really keep track of your expenses well when it’s all mixed up. You don’t need a fancy bank account—any will do.
Rule #3: Get general liability insurance
Basic liability insurance is an expense (mine costs about $1300 USD a year, but that’s for my particular services), but if you’re providing any type of guidance, mentoring, services, or events, it’s a must. I can go into all sorts of potential lawsuits that you hopefully won’t have, but if you even have one, your organization will likely go bankrupt if you don’t have the protection insurance provides.
This is not meant to be an in-depth article of all the things you can do, but EVERY EA org that is providing some type of service should have this in place. There’s no reason to have our leaders assuming unnecessary risk.
I don’t know what this looks like if you’re fiscally sponsored—I’d assume that they assume the liability—but I would love it if someone could clarify.
I hope we can start changing the standard practices to protect our leaders and organizations. If anyone has any questions about their particular org, please feel free to reach out.
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To expound on point 1, maintaining corporate protections is not a one-time deal. You also need to follow the required corporate formalities on an ongoing basis.
For point 3, it could be rational to go without general liability insurance in some cases—e.g., where the risk is low, the organization has little in the way of assets, and any person with potential personal liability has few assets without a substantial income. Being “judgment-proof” is a viable defense strategy, or at least “judgment-proof” enough that litigation would cost the plaintiff more than they could reasonably hope to collect. Whether having adequate insurance to cover risks borne by third parties is a moral obligation is an exercise left to the reader.
Other insurance considerations: if you regularly use your personally-owned automobile for business purposes, you should probably discuss that with an insurance agent in addition to discussing a general liability insurance policy. Also—I think most EAs are in pretty low-risk lines of work for worker’s compensation, but it is available (and sometimes required) for organizations with a single employee.
Very late to this, but just adding that incorporating in Australia is relatively easy and inexpensive too (~$500 AUD, 15-20 hours). Ongoing compliance burden is low, and incorporating as a ‘not-for-profit limited liability company’ provides good legal protections.
The biggest downside is the limitations on the activities able to be undertaken by any charity, and if your charity is tax-deductible—the range of activities you can undertake is very much constrained.
We have similar restrictions on non-profits in the US. (Under US regulations not all non-profits are charities, but most are.)
One option is to just do the same thing as a for profit entity, however, shareholders can sue if you aren’t making decisions based on making profits.
Same general principles apply in the UK—a simple guide is here: https://forum.effectivealtruism.org/posts/ZwTrykpvztrF5FQQL/how-to-set-up-a-uk-organisation-limited-company-version
D&O insurance should be a consideration as well.
Out of curiosity, have any of the major EA orgs been involved in any lawsuits to date? I’ve never heard of any, but even if there have been none, we can’t assume there never will be.
It is common for lawsuits [edit: or legal threats] to end in settlements which include everyone involved agreeing not to talk about it. I can think of several involving orgs within the EA community.
It may be better to seek fiscal sponsorship from a relevant existing non-profit org.
Setting up a microsized non-profit—less than $50K expected revenue in first three years—in the US could be made rather easy and not expensive. The 1023-EZ is surprisingly not misnamed.
In the arts in the US it’s common for a grant or donations to be given to a non-profit who takes 6-10% and then the rest is given to the artist, filmmaker, or for profit production company.
Note: Liability insurance works differently in different countries. For example in the US if I work as a doctor for three years and pay premiums for liability insurance during those three years, then any liability for any actions during that time are covered forever. If someone sues me for something that happened during that time period after I’ve retired I’m covered because I paid premiums during the time of the incident.
In other countries you are only covered if you have paid for insurance during the time period that you are sued. (They have additional policies to cover you after you leave a job or profession.)
This is not quite correct on the specifics. In the US, insurers write both claims-made and occurence policies. Your description of US med mal policies is an occurence policy, but I believe most med mal / professional liability coverage is claims made. In contrast, US car insurance is at least generally occurence. One needs to consult the specific insurance contract in question.
See generally https://www.thehartford.com/business-insurance/claims-made-vs-occurrence, a large US insurer who writes both kinds