Nonprofits and Piercing the Corporate Veil
The corporate veil is a legal doctrine that recognizes a corporation, whether a for-profit or nonprofit organization, as its own legal entity separate from its owners or members. In practical terms, that means the nonprofit can enter into contracts, own assets, employ staff, and assume risk without exposing board members or related organizations to personal liability.
When courts pierce the corporate veil of a nonprofit, those protections are lost and board members can be held liable for the actions of the organization. Understanding how the corporate veil works and what’s necessary to keep it in place is an important part of nonprofit governance and risk management.
Oklahoma law and nonprofit board protection
Oklahoma statutes provide strong protections for nonprofit board members. Under Title 18 of the Oklahoma Statutes, the Legislature has explicitly recognized that nonprofit organizations serve an important public purpose and that exposing volunteer directors to broad personal liability would discourage participation and harm the public interest.
Under Oklahoma law, directors of qualifying nonprofit organizations are generally not personally liable for the negligent acts or omissions of nonprofit employees or other directors. However, those protections do have limits. Protections do not extend to conduct that involves breaches of fiduciary duty, intentional misconduct, knowingly violating the law, or transactions that provide improper personal benefit.
In other words, Oklahoma law is designed to protect board members, but it expects nonprofit boards to act with care, loyalty, and good faith in carrying out their duties.
Fiduciary duties and the strength of the veil
The corporate veil is strongest when board members consistently fulfill their fiduciary duties to the organization. Those duties guide how decisions are made, how conflicts are handled, and how organizational assets are protected.
When directors put personal interests ahead of the nonprofit, ignore governance responsibilities, or fail to exercise meaningful oversight, the risk of liability increases. Courts examining whether to pierce the corporate veil often look to patterns of behavior rather than isolated mistakes. Regular meeting attendance, informed decision-making, proper documentation, and adherence to organizational policies all help reinforce the legal separation between individuals and the organization, thus keeping the corporate veil intact.
Structural tools that can help protect the corporate veil
In addition to governance practices, some nonprofits use additional legal structures to manage risk. These structures are not required for every organization, but when used appropriately, they can help reinforce the corporate veil and protect charitable assets.
Two common structures are a disregarded-entity limited liability company and a blocker C corporation.
Disregarded-entity LLCs
A nonprofit may form a wholly owned limited liability company (LLC) that is treated as a disregarded entity for tax purposes. In this structure, the LLC does not seek its own tax-exempt status. Instead, its activities are reported under the parent nonprofit’s tax return, typically on Schedule R of Form 990.
Even though the LLC is disregarded for tax purposes, it is still a separate legal entity under state law. That legal separation can be helpful when the nonprofit wants to isolate certain activities, assets, or risks. To maintain that protection, the LLC must be treated as its own entity in practice. This includes having its own bank account, appropriate insurance, clear governance authority, and documented decision-making.
When nonprofits fail to maintain these separations, courts may view the LLC as indistinguishable from the parent organization, which weakens the corporate veil rather than strengthening it.
Blocker C corporations
A blocker C corporation is a for-profit entity owned by a nonprofit that is often used to manage activities that could otherwise expose the nonprofit to tax or liability risk. Unlike an LLC, a blocker C is a separate taxpayer and cannot receive tax-deductible donations.
Nonprofits may use blocker C corporations to conduct certain revenue-generating activities while protecting the nonprofit’s tax-exempt status and limiting exposure. Income is typically returned to the nonprofit in the form of dividends, which are treated differently for tax purposes than unrelated business income.
As with any separate entity, a blocker C only provides protection if it is operated independently of its partnered nonprofit. Courts evaluating whether to pierce the corporate veil look closely at whether the blocker C has its own governance, maintains separate financial records, observes corporate formalities, and conducts transactions with the nonprofit at arm’s length. A blocker C that exists on paper but not in practice may offer little protection in a dispute.
Structure alone is not enough
One of the most common misconceptions about piercing the corporate veil is that forming a separate entity automatically provides protection. In reality, courts focus less on the structure itself and more on how that structure is respected over time.
When entities share bank accounts, blur governance lines, ignore documentation requirements, or treat assets as interchangeable, courts are more likely to disregard formal separations. The same principles that apply to small businesses and personal liability apply in the nonprofit context. If organizations do not treat entities as separate, courts likely won’t see them as separate either.
Strong governance, clear documentation, and respect for legal separations go a long way toward preserving protections. When nonprofits combine sound fiduciary practices with appropriate legal structures, they are better positioned to protect their missions, their assets, and the individuals who serve them.
Supporting nonprofits through governance and structure
At Nonprofit Solutions Law, we help nonprofit organizations understand how governance, fiduciary duties, and organizational structure work together to protect both the organization and the people behind it. Our team advises nonprofits on entity formation, board practices, compliance obligations, and risk management strategies tailored to their operations.
If you have questions about corporate structure, board liability, or preserving the corporate veil, our team is available to help you evaluate your organization’s approach and identify areas for improvement. Contact us to learn more.