0 found this answer helpful | 0 lawyers … 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. Enter a large financially-healthy nonprofit, able to take over back office and administrative functions for the smaller nonprofit. 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. They are helpful in preventing or resolving conflict and disagreements. In my experience, the integrity of the governing body will take over and quickly remove the bad seed that can … THESE BYLAWS ARE A SAMPLE ONLY. This is a decision you will have to make at your first meeting when you adopt your Bylaws. 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. Lawyer's Assistant: Has anything been officially filed? 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. The Sole Member of the Corporation shall be USA Rugby (the “Sole Member”). 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. This is a decision you will have to make at your first meeting when you adopt your Bylaws. They can help grow and manage complex organizations. Q&A: Nonprofit Bylaws, Members, & Governance. Box 482 Section 8: Notice. Every founder needs to determine his or her role within the organization. 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. 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. Nonprofits are owned by the people, and as such it is up to the board of directors to choose an … In fact, for as long as I have been on the board, members … 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. Not a subscriber and want to access this page? 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. Staggered Boards and Limited Removal Rights. 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. Nonprofit board members are often more familiar with the for-profit world than they are the nonprofit sector. For-profit companies make up most of them. BYLAWS … 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. Corporate sole membership structures can be useful to all everyone involved. Most … New Subscribers can have full access to the entire website and all editions for 3 months for only $17.95. 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 a tax-exempt organization your nonprofit will be accountable to the people it serves, to its funders, the attorney general, and the general public. But the more honestly you can see the world, the better your decisions will be.” Practice saying no. I am trying to set up a Nonprofit organization to bring development to third world counties, Especially in Myanmar and India. For-Profit Business Structures There are several different types of business entities. It can also specify when, where, and how your board of directors can … They can hire employees and pay their directors, but they do not pay dividends or issue stock. Thanks again for your excellent and helpful website - it's a wonderful resource for the non-profit community! This is … 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. 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. However, no board member shall serve more than two three-year terms. 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. Governance best practices, along with many state laws, require independent board members to carefully review related party transactions. ... As a founder and board member, I could see the handwriting on the wall after we hired our first full-time ED. 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. Non-profit Bylaws is … 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. 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. 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. 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. Must insurance cover 137 yard hole-in-one? (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 … However, a nonprofit's main goal is not to make a profit. Membership in your nonprofit can be limited to your board of directors or it can also include members of the public. Although nonprofits do not have owners in the sense that for-profit corporatio… P.O. Every founder needs to determine his or her role within the organization. But let’s step back for a minute to consider some of the practical and legal issues that can arise with sole member structures. 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… Q&A: Nonprofit Bylaws, Members, & Governance. A Board can protect itself from legal challenges by adhering to its Bylaws. That’s why nearly every nonprofit website includes an “About Us”, “Board”, or “Team” page that lets donors know who is in charge. --Stephanie H. Thank you for your informative and keen advice on nonprofit matters. [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. 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. 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. For the foreseeable future we will be answering a question a day. Another possible solution is for certain board seats to be reserved for independent board members, individuals who are NOT appointed by the sole member. 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. Sign up to receive our regular free content. The founder's participation can be protected and one of the places this can happen is in the bylaws. So you can be the sole shareholder, director and officer for your company. Membership in your nonprofit can be limited to your board of directors or it can also include members of the public. 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. The first Board will include members with one and two-year terms to begin staggered terms. 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 … You can have more if needed, but one per year is the minimum. This site uses Akismet to reduce spam. 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 … Bylaws are used to guide the board’s actions and decisions. 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.  Learn how your comment data is processed. I notice that we are supposed to have members, but under the bylaws it is not clear what their role is. 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. In many cases, however, there is reluctance among board members to treat transactions with the sole member as creating a conflict of interest. They want to feel like they understand the values of the organization they support and who is responsible for making decisions. You can buy the 9 page PDF in our store for only $5.95. A single-member L… By making themselves the sole member, the founder can give themselves the power to appoint or remove board members. Have not changed or amended the bylaws … Even the use of an LLC is extremely rare, because all nonprofit LLC members must be other, existing 501(c)(3) organizations, not individuals … I notice that we are supposed to have members, but under the bylaws it is not clear what their role is. 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. 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. (Indemnification refers to one party covering losses for harm to another. 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. Have a question for us? Submit yours here. I am worried if the board members … Materials prepared by Nonprofit Issues® contained in these pages is copyrighted by Nonprofit Issues®, Inc., 2009-2020. After all, the owners of limited liability companies are called members. They are helpful in preventing or resolving conflict and disagreements. 3. It can also be an intermediary step to a full merger transaction. 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. Section 2. So you can be the sole shareholder, director and officer for your company. The first Board will include members with one and two-year terms to begin staggered terms. 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. Regulators want to know that transactions are properly and fairly approved. (PA CLE & CPE credit is available for this webinar). Nonprofit corporations offer the same limited liability and asset protection features of a normal corporation. Sole voting member corporations can be structured in a manner that approximates ownership. How are nonprofit bylaws created and amended? By introducing a sole member structure, you risk confusing donors if the relationship isn’t clearly defined. 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. 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. Nonprofit Issues®, Inc. They can protect the organization from potential problems by clearly outlining rules around authority levels, rights, and expectations. Strategies to Implement a Sole Member Structure. Nonprofit board members face special challenges when a corporate entity is designated the sole member of nonprofit. The larger nonprofit’s board may also want to protect the larger nonprofit from liability by maintaining the separate legal entity. Unlike other corporations, nonprofit corporations do not have shareholders or owners. They are not distributed to shareholders as dividends. 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 questions covered many topics: business continuity, bylaws, meetings, employment issues and many more. 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. 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. All corporations need to hold an annual shareholder meeting and a board of directors meeting. 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. In a 501(c)(3), even one with members, the board members’ fiduciary duties are owed to the organization and, tangentially, the public. Here's what our readers say about Nonprofit Issues [ii] There are many other options (such as an LLC) that could accomplish this goal, but we won’t get into those in this article. If so, what? Our organization is now reviewing its bylaws for the first time in fifteen years. A quorum must be attended by at least forty percent of the Board members before business can … When implementing a sole member structure, avoid key pitfalls. On March 24, 2020 we started receiving coronavirus questions from our readers. Membership in your nonprofit can be limited to your board of directors or it can also include members of the public. Yes, been in operation since 2011. Lawyer's Assistant: Can you tell me where the nonprofit is registered? As a tax-exempt … Dresher, PA 19025, The right to appoint and remove directors and veto any amendments to governing documents is critical to control of the organization. BYLAWS MUST REFLECT THE LEGAL REQUIREMENTS OF THE JURISDICTION IN WHICH THE ORGANIZATION IS INCORPORATED. 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. [Photo: Flickr user Smudge 9000 ] By Christina Farr 4 minute Read 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. Nonprofits should clearly message what functions will and will not change. Where the act of the Sole Member is required under the NPCL or these Bylaws, the Sole Member … I am trying to set up a Nonprofit organization to bring development to third world counties, Especially in Myanmar and India. 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. Historically, however, a nonprofit was a membership corporation and the “members” were responsible for electing the board. 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 following example outlines requirements and governance of a nonprofit that is open to … A lot. That’s not the way nonprofit law works for 501(c)(3) organizations. Board members have a duty to understand the Bylaws of the organization and ensure that the provisions are followed. … 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. This founder was fired by his board twice and shares his advice on how fellow founders can avoid a similar fate. 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. Section 7: Quorum. 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. 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. What are the Administrative Meeting Requirements for a Single Shareholder Corporation? 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. [i] Where a corporate entity is the sole member and the corporate entity itself is owned or controlled by at least three people. Nonprofits should balance the control of the board by the sole member with directors’ fiduciary obligations.  The full text of this article is available to paid subscribers only. Login or subscribe to read more. In fact, any profits made by a nonprofit organizationhave to go towards furthering the company's goals. --Richard T.Â. Bylaws are used to guide the board’s actions and decisions. Our organization is now reviewing its bylaws for the first time in fifteen years. In GA State, can a Sole Member Bylaws Protect Founder of Nonprofit? IRS regulations are clear in establishing that nonprofit corporations' earnings cannot inure to the benefit of any individual. 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. 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. … They can protect the organization from potential problems by clearly outlining rules around authority levels, rights, and expectations. 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. 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. Donors deserve to know if money given to one organization will end up supporting another organization (albeit indirectly). Independent directors can also be useful barometers of the board’s performance and governance. 2. INDEMNIFICATION. Board Appointed by Third-Party. Prior results do not guarantee a similar outcome. BYLAWS OF PROTECT THE ENVIRONMENT NOW, INC. Section 7: Quorum. Similarly, governance, HR, and oversight functions should be reviewed to see how to efficiently operate with closely related organizations. For this reason, many nonprofit subsidiaries are created with the parent corporation as the sole corporate member of the subsidiary. 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. You can … Required fields are marked *. 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. A youth swim team. 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. What you're describing sounds more like a social entrepreneurship than a non-profit. 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. For this reason, many nonprofit subsidiaries are created with the parent corporation as the sole corporate member … 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 … However, no board member shall serve more than two three-year terms. A nonprofit that cannot show that its actions comport with the requirements of its Bylaws is vulnerable to lawsuits. I believe it's a unique and concise place to get answers to this often wispy area called nonprofit. 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