Corporate sole membership structures can be useful to all everyone involved. Probably the most difficult thing to realize is that you will not be the owner of the organization. For-profit companies make up most of them. This is a decision you will have to make at your first meeting when you adopt your Bylaws. This allows the sole member to have a veto power over board decisions that the sole member disagrees with – they can always remove (or threaten to remove) board members who vote against the sole member’s interests.  The full text of this article is available to paid subscribers only. Login or subscribe to read more. Wednesday, January 13, 2021 New Subscribers can have full access to the entire website and all editions for 3 months for only $17.95. I am trying to set up a Nonprofit organization to bring development to third world counties, Especially in Myanmar and India. There is no federal prohibition against that structure, provided that the controlled nonprofit and its Board observe all of the other rules applicable to 501(c)(3) organizations. Probably the most difficult thing to realize is that you will not be the owner of the organization. Governance best practices, along with many state laws, require independent board members to carefully review related party transactions. Bylaws are used to guide the board’s actions and decisions. Both organizations recognize that the smaller nonprofit has developed goodwill, so they don’t want to just absorb the smaller nonprofit’s programs into the larger nonprofit – there’s a benefit to keeping the smaller organization as a separate legal entity, with its “brand” and support intact. Section 7: Quorum. If so, what? We have frequently referred to a “sole member” corporation to protect a founder of a nonprofit corporation when the founder wants assurance that he or she can develop the organization as a career to help make the world better in some way. What are the Administrative Meeting Requirements for a Single Shareholder Corporation? A voting member corporation can also have a sole member or a sole corporate member which can result in the tightest control one can exercise over a nonprofit corporation. It can also specify when, where, and how your board of directors can … Regulators want to know that transactions are properly and fairly approved. The first Board will include members with one and two-year terms to begin staggered terms. IRS regulations are clear in establishing that nonprofit corporations' earnings cannot inure to the benefit of any individual. Nonprofit corporations offer the same limited liability and asset protection features of a normal corporation. Q&A: Nonprofit Bylaws, Members, & Governance. When implementing a sole member structure, avoid key pitfalls. Not everyone believes that they are appropriate or in the public interest.  But we have seen too many founders, who work for years essentially as volunteers, to create an organization and then get fired when their “best friends” on the Board decide to go in a different direction.  This Ready Reference Page contains a complete form of bylaws to provide protection to the founder.Â. For-Profit Business Structures There are several different types of business entities. The Sole Member of the Corporation shall be USA Rugby (the “Sole Member”). However, nonprofit companies do not have owners. Sole voting member corporations can be structured in a manner that approximates ownership. Lawyer's Assistant: Has anything been officially filed? This founder was fired by his board twice and shares his advice on how fellow founders can avoid a similar fate. In some scenarios, leaving in largely separate systems might make sense, whereas in others the new sole member might displace a number of the controlled nonprofit’s overhead functions. The founder, who is passionate about the organization and its mission, is especially sensitive to mission creep. Corporate bylaws commonly include information that specifies, for example, the number of directors the corporation has, how they will be elected, their qualification, and the length of their terms. Section 8: Notice. Your email address will not be published. Another possible solution is for certain board seats to be reserved for independent board members, individuals who are NOT appointed by the sole member. [ii] The large nonprofit, to encourage the small nonprofit to be self-sufficient, could set the new nonprofit up as a separate 501(c)(3) public charit with its own board and staff. Wherever the sole member enters into a major transaction with the controlled nonprofit, best practice would require that only independent directors should be involved in reviewing and approving those transactions. 2. Commentary: Keep Charities Out of Politics, Parent-child centers qualify for tax exemption, Club Can’t Compel Arbitration Based on Notice on Back of Renewal Form, Board has inherent power to suspend club members, NY AG Able to Require Donor List For Charitable Solicitation Registration, Director Retains Standing to Sue Even After Removal from Board, Attorney General Can’t Cy Pres Assets Of One Volunteer Fire Company to Another. How are nonprofit bylaws … (See Ready Reference Pages: “Bylaws Function as 'Constitution' of Nonprofit Corporations” and "Sole Member Bylaws Can Protect Founder of Nonprofit") Be sure to provide that neither the articles nor the bylaws can be amended to eliminate the sole membership without the approval of the sole member so long as the sole member … Every founder needs to determine his or her role within the organization. By making themselves the sole member, the founder can give themselves the power to appoint or remove board members. But we have heard from board members at nonprofits controlled by a sole member who are confused or frustrated by the ways in which they believe decisions that would be in the best interest of their nonprofit are at odds with the sole member’s interests. Most founders use this veto power for good. Lawyer's Assistant: Can you tell me where the nonprofit is registered? What you're describing sounds more like a social entrepreneurship than a non-profit. Not a subscriber and want to access this page? In fact, for as long as I have been on the board, members … They are not distributed to shareholders as dividends. Donors deserve to know if money given to one organization will end up supporting another organization (albeit indirectly). A well planned non-profit bylaws with clear structure will take out the guess work and corruption out of your organization especially in time of disagreement between board members. Below I walk through:  (i) what is a sole member structure; (ii) how sole member nonprofits are useful; (iii) when implementing a sole member structure, what are some challenges; and (iv) suggestions to help implement a sole member structure. Here are a few that all have an owner or owners: With the exception of the LLC, none of the business structures listed above can be used for nonprofit organizations. Placed in that position, the controlled nonprofit’s board members can feel helpless – stand up for what they believe are the best interests of the controlled nonprofit and they risk being removed from the board, but yielding to the sole member could be a breach of their fiduciary duty to their organization. This conflates practical considerations with legal ones – just because a controlled nonprofit needs the sole member doesn’t mean it should accept any transaction with the sole member without proper consideration of alternatives. Here's what our readers say about Nonprofit Issues This is … What are the Administrative Meeting Requirements for a Single Shareholder Corporation? Similarly, governance, HR, and oversight functions should be reviewed to see how to efficiently operate with closely related organizations. Typically, the arrangement is used by a large, well-funded nonprofit that is either (i) forming a new entity in which to house a new activity, or (ii) taking control of an existing nonprofit. If the new market creates new types of legal or financial exposure, the large nonprofit might want to insulate itself by housing the new venture in a separate legal entity. While it’s true there are a million great programs that you can come up with and jumpstart (otherwise there wouldn’t be 1.5 million unique nonprofits operating in the US) you just can… As a tax-exempt organization your nonprofit will be accountable to the people it serves, to its funders, the attorney general, and the general public. As with anything, board members should be prudent when contemplating a sole membership structure. Fired YMCA exec may proceed with discrimination claims, Women Under-Represented on Boards Of Large Educational and Medical Institutions, Member of Nonprofit Can’t Sue To Protest Suspension of Membership Rights, University property leased for child care not exempt, Unsuccessful College Applicants Lack Standing to Sue in Admissions Scandal, Sole Member Bylaws Can Protect Founder of Nonprofit, You can buy the 9 page PDF in our store for only $5.95. However, no board member shall serve more than two three-year terms. A lot. Another scenario where we often see a sole member structure is a small nonprofit that is approaching an inflection point and is in need of assistance. A nonprofit that cannot show that its actions comport with the requirements of its Bylaws is vulnerable to lawsuits. The first Board will include members with one and two-year terms to begin staggered terms. So you can be the sole shareholder, director and officer for your company. By insulating directors slightly from the sole member, directors will have the space to speak critically when they feel the organization is being led down the wrong path. In GA State, can a Sole Member Bylaws Protect Founder of Nonprofit? Who the “members” differed from organization to organization, but the members met at least annually and took an active role in electing the board of the organization. Section 2. In a for-profit, board members owe their fiduciary duties to the shareholders and the organization. The … I believe it's a unique and concise place to get answers to this often wispy area called nonprofit. Dresher, PA 19025, The right to appoint and remove directors and veto any amendments to governing documents is critical to control of the organization. [Photo: Flickr user Smudge 9000 ] By Christina Farr 4 minute Read This is a decision you will have to make at your first meeting when you adopt your Bylaws. In fact, for as long as I have been on the board, members … In fact, any profits made by a nonprofit organizationhave to go towards furthering the company's goals. How are nonprofit bylaws created and amended? You can state, "Founder or their named successor shall remain the sole member of the organization and shall have the right to veto any decisions made without his or her approval." A formal merger with, or transfer of assets to, a larger nonprofit often requires regulatory approval and generally entails more legal fees and staff time to implement. ... As a founder and board member, I could see the handwriting on the wall after we hired our first full-time ED. As a tax-exempt … However, no board member shall serve more than two three-year terms. A single-member L… It grew out of regulators’ and lawmakers’ concerns that a sole member structure is susceptible to abuse – a nonprofit controlled by one or two people is more likely to engage in self-dealing or private benefit transactions, both of which are prohibited under state and federal law. You need to make sure that board members are fully briefed on their obligations, both to protect the organization and uphold their legal duties as board members. The Statutory Member may adopt, amend or repeal any of these Bylaws, except that no amendment shall change any provisions of the Charter that created the ABC Charter School or make any provisions of these Bylaws inconsistent with that Charter, the corporation’s Articles of Incorporation, or any laws. Often we hear that the interests of both organizations are aligned, and the controlled nonprofit is wholly dependent on the sole member, so board members think it does not make sense to treat a transaction with the sole member as a conflict of interest. Strategies to Implement a Sole Member Structure. They can help grow and manage complex organizations. Donors want to know where their money and support is going. If they sense that board members are not pulling their weight or are moving the nonprofit in the wrong direction, the sole member can appoint new board members and remove the bad ones to get the nonprofit back on track. They are helpful in preventing or resolving conflict and disagreements. Nonprofit board members face special challenges when a corporate entity is designated the sole member of nonprofit. [Photo: Flickr user Smudge 9000 ] By Christina Farr 4 minute Read In a 501(c)(3), even one with members, the board members’ fiduciary duties are owed to the organization and, tangentially, the public. A membership structure parallels the shareholder structure of a for-profit corporations, where shareholders elect directors to the Board but are removed from the corporation’s day-to-day operations. Board members have a duty to understand the Bylaws of the organization and ensure that the provisions are followed. For this reason, it is a popular structure to use when creating a nonprofit subsidiary. Non-profit Bylaws is … Section 2.2 Manner of Acting. Membership in your nonprofit can be limited to your board of directors or it can also include members of the public. None of the information on the Nonprofit Issues® Website should be deemed legal advice or should be acted upon without prior consultation with appropriate professional advisors. While there may be some start-up support, the goal is often to have the large nonprofit’s input be limited to high-level oversight and the appointment of the board members each year. Many states’ laws still allow one person, or one corporation, to be the “sole member” of a nonprofit, retaining the right to elect and remove directors. Enter a large financially-healthy nonprofit, able to take over back office and administrative functions for the smaller nonprofit. For instance, the sole member may believe that entering into a management agreement with the controlled nonprofit would be in everyone’s best interests, but board members at the controlled nonprofit think the management fees the sole member wants to charge are too high. A youth swim team. BYLAWS MUST REFLECT THE LEGAL REQUIREMENTS OF THE JURISDICTION IN WHICH THE ORGANIZATION IS INCORPORATED. THESE BYLAWS ARE A SAMPLE ONLY. The main reason that a tax-exempt organization would form a single-member LLC is to handle an activity related to the charity while protecting the parent organization from the possible liabilities that may result from the activity. It's in California. Most … This allows the sole member to have a veto power over board decisions that the sole member disagrees with – they can always remove (or threaten to remove) board members who vote against the sole member’s … This will likely be limited to a small minority of the Board, but a small number of directors can play a big role in providing assurance to the whole board that transactions, including ones with the sole member, are in the best interests of the controlled nonprofit. One way to do that is to stagger board terms (for instance, three year terms with 1/3 of the board up each year) and place some limitation on the sole member’s right to remove directors. The term "member" is somewhat misleading when applied to nonprofit organizations, as it brings connotations of ownership. [i] Where a corporate entity is the sole member and the corporate entity itself is owned or controlled by at least three people. They are helpful in preventing or resolving conflict and disagreements. That’s why nearly every nonprofit website includes an “About Us”, “Board”, or “Team” page that lets donors know who is in charge. I notice that we are supposed to have members, but under the bylaws it is not clear what their role is. Sign up to receive our regular free content. Required fields are marked *. The founder's participation can be protected and one of the places this can happen is in the bylaws. Your email address will not be published. You can have more if needed, but one per year is the minimum. A nonprofit sole member structure puts directors of the subsidiary in a challenging position because their fiduciary duties to the nonprofit can sometimes put them at odds with the interests and direction of the sole member. Founders need to protect themselves in the bylaws while at the same time being self-reflective at the evolving ways they can best serve the organization as an entity apart from themselves. Thanks again for your excellent and helpful website - it's a wonderful resource for the non-profit community! For the foreseeable future we will be answering a question a day. Board Appointed by Third-Party. Staff need to know to whom they are answering and who is setting policy internally. For example, if a nonprofit is intended to serve as an affiliate to an existing nonprofit parent, the parent could act a the sole voting member … 1:30 to 3:00 PM ET, The year 2020 has been a year like no other for nonprofits.  With a combination of COVID-19, an economic recession, and a shift in emphasis on racial justice, many nonprofits have struggled.  Many have had to consider changes in their basic structure — mergers, acquisitions, new strategic alliances, hibernation, and, in many cases, dissolution. Download the full report free. The questions covered many topics: business continuity, bylaws, meetings, employment issues and many more. Staggered Boards and Limited Removal Rights. In GA State, can a Sole Member Bylaws Protect Founder of Nonprofit? P.O. Historically, however, a nonprofit was a membership corporation and the “members” were responsible for electing the board. The following example outlines requirements and governance of a nonprofit that is open to … While New York’s new law doesn’t affect nonprofits that are controlled by other nonprofits[i], the reasoning for New York’s change is instructive. Have not changed or amended the bylaws … This site uses Akismet to reduce spam. In many cases, however, there is reluctance among board members to treat transactions with the sole member as creating a conflict of interest. Internally and externally, the sole member and the controlled nonprofit should make sure it is clear how the entities are related and how they work together. Bylaws are used to guide the board’s actions and decisions. This founder was fired by his board twice and shares his advice on how fellow founders can avoid a similar fate. 3. A quorum must be attended by at least forty percent of the Board members before business can … Thank you for your informative and keen advice on nonprofit matters. Founders need to protect themselves in the bylaws while at the same time being self-reflective at the evolving ways they can best serve the organization as an entity apart from themselves. Hello,Sole Member Bylaws Can Protect Founder of Nonprofit I'm looking for a sole member bylaw that can protect me, the founder. Nonprofits are owned by the people, and as such it is up to the board of directors to choose an … So you can be the sole shareholder, director and officer for your company. They can protect the organization from potential problems by clearly outlining rules around authority levels, rights, and expectations. The large nonprofit can ensure there’s no mission creep through its control of the board of the new nonprofit, but it owes no legal duty to the smaller nonprofit. Potential pitfalls can be mitigated by embedding certain structural safeguards to protect the controlled nonprofit’s independence, which should ultimately provide reassurance to the boards of BOTH organizations that a healthy corporate structure is in place. … I notice that we are supposed to have members, but under the bylaws it is not clear what their role is. Learn how your comment data is processed. A third situation where we often see a sole member structure used is where a large nonprofit identifies a new market – either a new location where its programs can succeed, or a new type of program the nonprofit would like to implement. Donors, especially your biggest donors, do not want to call up a board member to discuss a major decision, only to learn there’s another entity the donor has never heard of that controls the board. 2. When staff members see a new organization come in as sole member, it can create anxiety about how operations will change. For this reason, many nonprofit subsidiaries are created with the parent corporation as the sole corporate member … While there are unscrupulous people in both the private and non-profit sectors, their ability to harm you will be dependent on your other Board members and the processes you have created within your organizational framework. On March 24, 2020 we started receiving coronavirus questions from our readers. As evident in recent legislation enacted in New York State at the end of 2018 that prohibited individuals from being the sole members of New York nonprofits, there are unique risks to structures where a tax-exempt entity’s board is effectively controlled by other entities or individuals. A Board can protect itself from legal challenges by adhering to its Bylaws. They want to feel like they understand the values of the organization they support and who is responsible for making decisions. Membership in your nonprofit can be limited to your board of directors or it can also include members of the public. Independent directors can also be useful barometers of the board’s performance and governance. Now that we’ve reviewed some common pitfalls, let’s talk about some relatively simple structural changes that can mitigate the possible downsides of a sole member structure. By making themselves the sole member, the founder can give themselves the power to appoint or remove board members. I believe it's a unique and concise place to get answers to this often wispy area called nonprofit. Modern nonprofits are typically run by a board of directors that is self-sustaining – that means the board elects new directors to fill empty board seats. Q&A: Nonprofit Bylaws, Members, & Governance. The sole member might still have the ability to remove directors, but that right can be limited to “for cause” removals or require ratification by a majority of the board. the founders, members, directors, officers and managers of a not-for-profit will have less control over a notfor- - profit corporation than if they established a for-profit … … Thanks again for your excellent and helpful website - it's a wonderful resource for the non-profit community! BYLAWS OF PROTECT THE ENVIRONMENT NOW, INC. Sole member structures can be very useful, especially when trying to quickly take over a nonprofit or when structuring a new organization to ensure it can be controlled going forward. Where the act of the Sole Member is required under the NPCL or these Bylaws, the Sole Member … Have a question for us? Submit yours here. Transaction costs are also much smaller in a change of control transaction involving a sole member compared to a traditional merger or acquisition – a sole member transition often requires little more than a minor revision to the bylaws to provide for a sole member. But the more honestly you can see the world, the better your decisions will be.” Practice saying no. A quorum must be attended by at least forty percent of the Board members before business can be transacted or motions made or passed. Materials prepared by Nonprofit Issues® contained in these pages is copyrighted by Nonprofit Issues®, Inc., 2009-2020. New York’s restrictions on sole member structures comes at a time when charities regularly use corporate sole member structures as part of a variety of major transactions and strategies. Nonprofits should balance the control of the board by the sole member with directors’ fiduciary obligations. Membership in your nonprofit can be limited to your board of directors or it can also include members of the public. You can … While it’s a difficult choice, legally the board members owe their loyalty first and foremost to the controlled nonprofit on whose board they sit. All corporations need to hold an annual shareholder meeting and a board of directors meeting. A founder of an organization does not, as a matter of law, have a specific right to continue to be recognized as such unless there are specific terms in the certificate of incorporation of … A good modern analogue is a labor union – the membership is active in electing the leadership, so even though the Board is still responsible for overseeing the union’s activities, the members can keep the Board in check. Must insurance cover 137 yard hole-in-one? It can also be an intermediary step to a full merger transaction. The larger nonprofit’s board may also want to protect the larger nonprofit from liability by maintaining the separate legal entity. Nonprofits should clearly message what functions will and will not change. While there are unscrupulous people in both the private and non-profit sectors, their ability to harm you will be dependent on your other Board members and the processes you have created within your organizational framework. As with any governance decision, a sole member structure should be well-considered and tailored to the needs of each organization at which its implemented. Every founder needs to determine his or her role within the organization. After all, the owners of limited liability companies are called members. I am trying to set up a Nonprofit organization to bring development to third world counties, Especially in Myanmar and India. INDEMNIFICATION. The sole member structure, therefore, has been popular as a way to give individuals or large nonprofits the ability to keep control over a subsidiary nonprofit. In my experience, the integrity of the governing body will take over and quickly remove the bad seed that can … Box 482 A sole member structure is really appealing when an individual or corporation creates a new nonprofit and wants to retain long term control over the nonprofit’s mission and activities. Yes, been in operation since 2011. Sole member structures can also mitigate legal exposure to their parent nonprofits. Increasing Gender Diversity on the Boards of Nonprofit Eds and Meds: Why and How to Do It, This report provides a rare inside view on barriers women face to selection and success that are particular to nonprofit organizations and makes specific recommendations on how to improve the gender ratio.  We have frequently referred to a “sole member” corporation to protect a founder of a nonprofit corporation when the founder wants assurance that he or she can develop the organization as a … Section 7: Quorum. Prior results do not guarantee a similar outcome. Our organization is now reviewing its bylaws for the first time in fifteen years. That’s not the way nonprofit law works for 501(c)(3) organizations. They can protect the organization from potential problems by clearly outlining rules around authority levels, rights, and expectations. The board of the controlled nonprofit is under a legal obligation to make sure that the transaction is fair to, and in the best interests of, that organization. Although nonprofits do not have owners in the sense that for-profit corporatio… Nonprofit Liability: Outline of Risks & Protections Best Practices to Protect Your Nonprofit's Tax-Exempt Status Sample Bylaw Provision: Conflicts of Interest Sample Bylaw Provision: Indemnification Liquor … BYLAWS … It’s true that you cannot own the nonprofit, but most states will allow you to create a “sole member” structure where the founder is the sole member and is able to select the board members. All corporations need to hold an annual shareholder meeting and a board of directors meeting. Many topics: business continuity, Bylaws, meetings, employment issues and many more for months. Me where the nonprofit is registered not clear what their role is the for-profit world than they helpful... 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