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Protecting Your Dream: Starting a Sole Member Nonprofit

Starting any type of business is a risky endeavor. Whether you’re starting a consulting firm, a food truck, or a nonprofit food pantry, entrepreneurs face unique risks. And given that nonprofits can’t have owners, many social entrepreneurs face an even higher level of risk. But there is a nonprofit governance model that can address some of these concerns: the sole member nonprofit.

The Problem

For 25 years Foundation Group has helped people all across the country start new nonprofits…over 20,000 of them! In that time, we’ve worked with virtually every startup scenario you can imagine. Many nonprofits get started with an already-recruited board of directors made up of high caliber individuals, a solid business plan, and significant funding in place or pledged. These nonprofits launch large and have immediate impact. The risk to any one individual is relatively small, and the volunteer board hires staff to run operations. In reality, though, these startups are the exceptions.

There’s an even larger group of startups that don’t look like that. It might surprise you to know that over 75% of new nonprofits have initial budgets under $50,000 per year! They are started and run by passionate individuals or families who see a need, and decide to tackle it. The founder recruits some board members who can help, is usually the President of said board, and is often the primary person who puts in the long hours to make it all happen as the ultimate super-volunteer. It’s their passion, their dream, and without them, nothing would ever get off the ground. Some even go so far as to leave their career and risk everything in the hope that someday, this little startup catches traction and is able to be a new, paid career.

Now, this individual could start a private foundation, and there’s nothing wrong with that. A private foundation is a 501(c)(3), after all, and it is allowed to have a closely held board of directors (such as all members of the same family). The problem with this choice, however, is that private foundations aren’t really designed for conducting programs. They’re better suited for grant making to the other, better choice of 501(c)(3): the public charity.

Further, rules governing private foundations make it very difficult for board members to be paid as employees, no matter how much work they’re doing for the organization. It’s not impossible, but it’s a narrow, heavily-scrutinized path. And finally, private foundations are usually internally funded, and external fundraising can be extra-challenging.

Want to understand more about the difference between private foundations and public charities?  Click here to learn more!

A public charity is the best choice of 501(c)(3) in such a situation, but it comes with its own problems, the most significant of which is the requirement for a majority-independent, unrelated board of directors. In such a scenario, the founder/president is but one vote among all the others on the board.

Sadly, there are situations where such a founder, the one who has shouldered all or most of the risk, eventually gets sideways with his/her board, and gets voted out of the very organization they started, they initially funded, and maybe they counted on to finish out their career.

Is that fair? Sometimes, yes. Sometimes the founder has worn out their welcome and has actually become a liability to the organization’s future. Far too often, however, it’s just simply tragic.

So is there a way for a social entrepreneur with outsized risk to prevent such an outcome? There is, and it’s called the sole member nonprofit.

What is a Sole (or Single) Member Nonprofit?

All nonprofits, including public charity 501(c)(3)s, are required to have a board of directors. Some organizations also have a membership that participates in governance.

You’ve likely seen nonprofits like this. You may have even been a member of such a nonprofit. Examples include churches with voting members, or maybe a private school where the tuition-paying parents make up the membership.

In membership organizations, the board of directors is still the primary governing group. It is the members who nominate and elect the board members who will represent them. Typically, the board will hold periodic meetings of the membership, at least annually, to update the members about the status of the organization, and to elect new directors for those whose term is expiring.

A sole member nonprofit is a unique version of this public charity, where the membership is made up of one, permanent member, usually the founder. You will occasionally see a variant of this that includes another person…maybe a spouse. The member(s) still has the requirement to seat a board of directors, which usually includes him-or herself.

The Benefits of a Sole Member Nonprofit

The most obvious benefit is the degree of protection provided to a founder who has risked much to start the nonprofit in the first place.

As stated above, in a sole member nonprofit, the board of directors is still the primary governing body. But, if the organization and its Articles of Incorporation and Bylaws are properly established, the board members are recruited and elected by the member(s), and effectively serve at the pleasure of the member. And in the unlikely event that the member was also part of the board, got sideways with the majority of the board, and was removed from the board, he or she is still the sole member of the organization. The board has no authority to remove the member. In fact, the member can (usually) unilaterally remove a director and replace them with someone else.

The net result of such a setup is relatively permanent protection for the founder/sole member, and the assurance that the sole member remains the driver of the vision long term.

The Downside of a Sole Member Nonprofit

While a sole member nonprofit structure can be invaluable to some founders, they are not without their problems.

The biggest downside is the risk of tunnel vision, or founder’s syndrome. You simply don’t find many successful organizations or companies that are controlled by one person who rules with an iron fist. You don’t have to have a sole member organization to see this. Unfortunately, way too many small nonprofits resemble little fiefdoms, run by dictator-founders who may have a board, but they’re a board of do-nothings who have no skin in the game and simply allow the organization to be an ego-exercise of one person.

Another problem that can arise is the difficulty in keeping board members. If a sole member simply treats directors as legally-required placeholders who are subject to removal if there is a disagreement, good luck finding anyone else willing to serve. Why would they?

Finally, this structure is not allowed in all states. New York, for example, requires at least 3 members in a member-run public charity. That may still work, but it’s not as solidly protective as sole member.

To run an effective sole member nonprofit, you have to know yourself and your real motivation for engineering a governing structure where you have that much control. Ideally, your motivation is to protect yourself from real risk, and to protect the vision of the charity. You’re smart enough to get real contributors of time, talent, and treasure on your board, people that you trust, to help you advance your mission. You let these directors fulfill their intended role to provide advice and consent, and you allow your ideas and methods to be challenged and improved on to make your nonprofit the best and most effective organization it can be.

Conclusion

Sole member nonprofits can be an incredibly effective way to both accomplish something wonderful in your community and to also protect founders who are putting it all on the line to make it happen. They’re complicated to set up, and they are definitely not a do-it-yourself project. Get help…call us if you want to form one of these. We know how to do it right.

A sole member structure is not the ideal setup for every 501(c)(3) public charity. It’s probably not the ideal structure for most of them. But, for a select few, it is truly the right way to establish a new nonprofit.

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Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 7 Comments

  1. Thank you very much for all the knowledge that you transmit to us. I have two questions and they have to do with obtaining funds and participating in contests for financing. First, how are single-member organizations perceived by other organizations or institutions that create competitions and grant funding? Does it influence the possibility of obtaining funds or participating in any way? What is the general perception of these organizations? The second question, is this information (the fact that an organization is a single member) in the public domain? Can anyone know? Is it necessary to show the bylaws to anyone? Thank you very much for your time, I am making use of your SURE START services, to incorporate in the state of Florida, your entire team that has assisted me is really friendly and very professional, I thank you all.

    1. Those are great questions. It’s hard to say how the public perceives sole-member organizations, mainly because most people aren’t aware that it is even a thing. As for potential funders, it may very well be an issue. This is anecdotal, but I would expect grant-making foundations would be wary of a sole-member charity, assuming they realized that was the case. The membership structure of your nonprofit is in the public domain, but it would take a little sleuthing to find that info. Bylaws don’t have to published, but are generally considered a public document should anyone want to see them. Also, your original IRS 501(c)(3) application becomes public record upon approval…and that contains a copy of your bylaws…so there is a way for people to see that if they want to.

  2. In the year of 2021, can you incorporate a sole member non profit in the state of Pennsylvania?

  3. Greetings,

    With a nonprofit that does not permit members and allows for board members to select their successors (are there still needs for term limits and elections), how can I implement founder protection? I was thinking of stating the following as an amendment to the bylaws.

    “The Founder or their named successor, as well as the board chair and their named successor, shall remain permanent members of the Board of Directors in the offices they were elected to hold until they have chosen to resign (not including Chief Financial Officer role), are not subject to board term limits, and shall have the right to veto any decisions made within the Board of Directors without their approval. The Founder and Board Chair may only be removed by other board members or Directors through requested resignation or by majority rule due to proven unfair and harmful leadership that transcends the authority of the Founder or Board Chair in their designated roles.”

    Also, is this even needed, or does the founder automatically not have to get reelected to stay in power as a board member? Thanks.

    1. Great questions. Such terms language may be legally acceptable, but you would need to make sure your state allows board membership to have no term limits. Even if term limits are required, virtually no state has a prohibition on successive terms. The role of “founder” isn’t really a role or position, but instead is simply a matter of fact that you founded the organization. It carries no automatic weight beyond that.

      As far as practicality, what you are suggesting regarding voting is actually a step further than sole member protection. You’re actually proposing veto power over board decisions. This probably won’t pass muster with the IRS, as it effectively renders your board powerless unless you approve of their decisions. It likely runs afoul of state law, as well. Better to make sure you have a board of truly trusted advisors instead.

      The fact is, there is always a risk associated with starting a nonprofit you can never own. Sole member governance addresses some of those concerns. If it’s too late to structure that for your nonprofit, do the best you can be building in permanent board membership for yourself (always subject to possible removal for reasons you stated) and choose others wisely.

  4. Thank you for the article . This articles is spot on to what I have been experiencing with my foundation for several years. With out a clear understanding of the subject matter .I found myself bumping the stump in completely understanding how to make things work. Thank you this helps me out tremendously. This was confirmation to me, that what I’ve been doing all this time . Makes sense to more than me. Traditional formation of a non profit is the norm. With my personality I am hands on, so this makes better sense to me.

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