Sole Member Nonprofit: BEST Way To Protect The Founder?

Whether you’re starting a consulting firm, a retail store, or the next Silicon Valley unicorn entrepreneurs face risk... even the social entrepreneur who is starting a nonprofit. But I would suggest that for some social entrepreneurs, the risks are even higher, especially since they cannot own the nonprofit they’re starting. See our recent video about who really owns a nonprofit to understand more about that. We’ll put a link in the description below.
📚 ADDITIONAL RESOURCES:
•VIDEO: What is a Disqualified Person in a Nonprofit? • What is a Disqualified...
•VIDEO: Who REALLY Owns a Nonprofit? • Who REALLY Owns a Nonp...
•VIDEO: Why You Should Incorporate Your New Nonprofit • Should You Incorporate...
•ARTICLE: Protecting Your Dream: Starting a Sole Member Nonprofit bit.ly/3RGjUhK
•ARTICLE: What is Nonprofit Founder’s Syndrome? bit.ly/3cYqf9K
🏆 YOUR NEXT STEP:
•Fill out this form for a FREE consultation on how to start a nonprofit: bit.ly/3Tu9nYE
•Register for Fundraising TV: www.501c3.org/fundraising-tv/
•Download the FREE eBook “10 Things You Need to Know Before Starting a Nonprofit” bit.ly/3XhFag0
0:00 Introduction
1:08 The Problem
4:13 The Solution: What is a Sole (or Single) Member Nonprofit?
5:05 The Benefits of a Sole Member Nonprofit
5:53 What About a Board Gone Rogue?
6:16 The Downside of a Sole Member Nonprofit
7:32 How It Works Best
8:20 Caution!

[@FoundationGroup]

If you need help filing for IRS 501(c)(3) status, we’d love to help. Fill out the form at bit.ly/3i6rFxz or give us a call at 888-361-9445.

[@jojoklemm2812]

Thank you for posting this video, and for successfully establishing our 501.

[@theshadowknowz5900]

Thnx

[@mikelee9588]

Hello! Thank you for this video. In your other videos, you mention how compensation has to be determined by someone who is not in a conflict of interest. How about for sole member 501c3s? If the board is consisting of 1 member (or 2), how do you recuse yourself in compensation decisions?

[@FoundationGroup]

The membership (whether 1 or 2) is not the same as the board of directors. In a sole member setup, you still have to have a functioning, majority independent board of directors seated. That board would be the ones making compensation decisions. If the sole member(s) was also a board member, that person would have to recuse themselves when voting on their employee salary.

[@comicbookjerk]

This is the one thing that worried me the most about filing a Non Profit.

[@FoundationGroup]

It worries a lot of people, for legitimate reasons. I've known quite a few people over the years who chose not to create a 501(c)(3) because the personal risk factor seemed too high. They didn't know that this structure was possible. Sole member structures, properly established with a real board of directors, can lessen that concern.

[@cowboycatranch]

What about bylaws? Those can be written in such a way that the founding board member keeps all control, correct? Veto power, requiring unanimous decision making, etc.?

[@FoundationGroup]

No, probably not. You cannot legally establish a public charity that cedes control to a single officer or director. The reason is that under corporate law governing nonprofits, these are equal statuses with equal responsibility and fiduciary duty. While you may give one officer or director more tasks to oversee, you really can't give one the power to control. The only way to do that effectively is through a creative membership structure, like sole member.

[@brandonnelson4017]

If my current articles do not include this, can I include these in the bylaws to establish the same concept? Or do I include a clause about serving as sole member? These videos have been incredibly helpful thank you!

[@FoundationGroup]

Hey, Brandon. So sorry we missed your question. I'll answer it here even if it's too late for you. Maybe it will help someone else. Changing an existing nonprofit into a sole member setup is doable, but it's tricky. For one, if you incorporated as a nonmember nonprofit, you'll have to update your Articles of Incorporation to change that setup. Depending upon your state, you may also have to notify the Charities division, since changing from nonmember to member is a significant governing structure alteration. You will also have to amend your bylaws to spell out the new governing structure and how it will work. Keep in mind that you'll have to follow your existing bylaws' provisions for amendment, which usually require a supermajority or unanimous vote of the existing board. You're asking your board members to approve a change that adds a layer above them...the member(s). Hope that helps.

[@MrsShantaMartin]

@@FoundationGroup after doing this, can you still file for 501(c)(3) status with a sole-member nonprofit under form 1023-EZ?

[@cjmor6590]

Ill probably implement these bylaws when i get married b4 i put my wife on the board. If it is a public charity can there be related members on the board with this particular setup?

[@gregmcray]

Yes, you can have related board members, but because this is a public charity, you probably want a majority of your board unrelated. Keep in mind that this isn't a "special" kind of 501c3. It's a public charity, subject to the same rules as all of them, including the expectation that the board is able to independently govern without favor or unfair benefit to any individual, including the sole member that appointed those board members. A sole member 501c3 is simply one where 1 member elects those on the board, thus providing a buffer to such a founder.

[@aaronjohnson6622]

This was going to be my next question. Is it frowned upon to elect family as board members or is it illegal to elect family as board members? By the way, I'm in California. Also, in this situation, what technically constitutes as a family member?

[@ginashen8974]

Hi Love u your video and share your knowledge. Is Private 501c and Sole Member 501c can apply grant and accept public donations? Is Sole Member 501c allow in CA, AZ and TX? Thank you

[@FoundationGroup]

Any 501(c)(3) can apply for grants and accept public donations. The IRS doesn't designate a "sole member" status, only whether the organization qualifies for 501(c)(3) status as a public charity or private foundation. Sole member is a unique governing structure, but not something the IRS categorizes as something different. And yes, sole member structures work in CA, AZ, and TX.

[@shoshor377]

Does the state of NJ allow sole member non profits?

[@show_your_teeth]

Cost?

[@user-pu9hg3sl2i]

So what happens when you are replaced as director? What role would you play then in the Sole Member Nonprofit? Do you still have the last say? Can you replace those who want to replace you, or the person they replaced you with. Because although there may be good reasons to remove you, there are also people who may simple want more control themselves and see you as a push over they can control with the power of the board. Bad people should never be in power, but neither should bullies! I would hate to lose my life's work on some bs technicality. Great video btw, but it feels like you can still be replaced as executive director. Which is a whole different video all together. Remaining the driver of the vision long term and being executive director is different, right? For example, you set a salary for the executive director (You), and you get replaced. No More Salary? I'm sorry this video left me with a new set of questions that just makes me nervous about starting a non-profit now. lol

[@FoundationGroup]

It's key to understand the difference between the role of Sole Member and that of director. Think of it as a pyramid. The sole member is at the top. They appoint the board members who are on the next tier and that board is tasked with the primary governance responsibility. Most membership-governed nonprofits run the same way, just with more than one person in membership. The membership (sole or otherwise) always has the authority, if necessary, to remove and replace any of the board members. However, the membership doesn't usually have veto rights over the board. This would be a dictator scenario that shouldn't occur. The board has to be allowed to govern. But if the board is going rogue in a different direction than the overall direction desired by membership, then that board can be replaced. It is an extreme situation for that to occur and shouldn't be normalized. You'll never find someone willing to serve on a board if they believe they're going to subject to such treatment. The Executive Director is usually a hired position similar to CEO. That person may or may not be a director or a member. No problem if they're either or both, so long as they don't engage in self-dealing activity.

[@salomeshunamon4737]

@@FoundationGroup Can you explain more about self-dealing activity?

[@AndyMaker]

Connecticut requires 3 directors for formation. Are the directors and members the same or do you still form with 3 directors and you serve as the only member? I’m confused with the terminology and am not sure if a sole member nonprofit is allowed in CT. Thanks for the input!

[@FoundationGroup]

Members and directors are not the same in this structure. In the case of sole membership there is, by definition, one member. That member appoints the initial board of directors, which should be majority independent. The board is still the primary governing authority on behalf of the membership. The member retains the rights to appoint and/or remove board members, though the board should at all times be sufficiently independent as to maintain a quorum for board purposes. It's a complex structure that is not right for everyone, but it is highly effective in the right circumstances. You'd have to look and see if CT allows for a membership of one.

[@AndyMaker]

@@FoundationGroup thank you for your reply. I’ll look into it. Thanks.

[@tonycordero955]

In another video you state that you should avoid setting up your non- profit in Delaware and just register it in your state... But in this video at the 7:29 mark you use NY as an example and mentioned that your better off registering in a Foreign a.k.a other state... I'm going in circles personally. So would you suggest your home state or " foreign " ..... I'm lost . Trying to write a college paper that's why I ask

[@FoundationGroup]

Great question, Tony. In general, there is little-to-no benefit for a typical nonprofit startup to incorporate in Delaware, unless Delaware is going to their primary base of operation. Most of the traditional benefits associated with Delaware incorporation simply don't matter to nonprofits that much...certainly not enough to make it worth having to deal with two states instead of one (their home-base state plus Delaware). The point in the video above is about New York in particular with regard to sole member nonprofits. New York doesn't allow nonprofits to incorporate in that state with a sole member governance model. If you plan to have a charity based in NY, but insist on the sole member model, you will have to incorporate somewhere else, like Delaware, then register that "foreign" corporation in NY after it is formed. Hope that helps.

[@matthew1814]

how does one about converting their existing 501c3 public charity into a sole member 501c3? thx!

[@FoundationGroup]

Give us a call, we may be able to help you out! 888-361-9445

[@aaronjohnson6622]

How do donors typically view sole member nonprofits? Are donors more hesitant about donating to them?

[@FoundationGroup]

Great question. Honestly, there's virtually no way a donor would know that. It's not a separate type of nonprofit, but rather an alternative governing structure. A sole member nonprofit is still a public charity that has an independent board of directors. Unless a donor were to somehow see the Articles of Incorporation or the bylaws, which is highly unlikely, then it shouldn't appear any different than a normal charity...because it IS a normal charity. It just happens to have a membership of one who appoints the independent board.

[@aaronjohnson6622]

@@FoundationGroup Thank you very much for the good information

[@aaronjohnson6622]

@@FoundationGroup also I responded in another person's message but what constitutes as family? I would like to have my family on the board. And is it illegal to have family on the board or is it just frowned upon?

[@FoundationGroup]

@@aaronjohnson6622 The IRS typically views "family" blood or marriage relations out to only one generation, meaning spouse, mother, father, son, daughter, etc. Beyone one generation, they will usually not get too antsy about it. Keep in mind that this is subjective, not objective. You'll never find IRS chapter-and-verse that says that.

[@aaronjohnson6622]

@@FoundationGroup thanks for the responses

[@davispbauer]

Can I make myself as ceo, treasurer, and director? Looking for 501c3 status in AZ

[@FoundationGroup]

3 very different titles. CEO is typically an employee or volunteer designation. It's a management role, not a governance role. Treasurer is an officer position that may or may not be combined with your role on the board as a Director. And yes, generally, you COULD occupy all 3 roles. The question is whether or not that makes sense. If you set up a 501c3 public charity, your board would need to approve these combined responsibilities, even if you set it up as Sole Member.