Who Owns a Nonprofit Corporation?

No one owns a nonprofitWhile there is no outright ownership, there is control. One of the fundamental questions I ask when forming a new nonprofit corporation is how board members will be selected. This is a key question because those who hold the power to select board members retain the ultimate authority over the corporation.

The possibilities are limited by the nonprofit corporation statute in the state where the corporation is domiciled. In Arizona, the possibilities include the following:

Self-perpetuating Board. A self-perpetuating board is a board that selects is own members. One advantage of a self-perpetuating board is its simplicity. The directors whose terms are ending elect their successors which may be themselves.

The downside of a self-perpetuating board is the potential for entrenchment. Self-perpetuating boards can lead to an overly chummy board where no one wants to risk hurting anyone’s feelings. This can lead to performance problems being overlooked out of politeness and can limit the organization’s ability to attract new board members with fresh perspectives and new ideas.

One way to avoid entrenchment is to limit the number of terms that the directors can serve. Another mechanism to avoid entrenchment is to stagger the boards into different groups whose terms end at different times. Staggered boards have the advantage of creating a mechanism to bring in new board members every year.

Member (or Delegate) Elected Board.  A board elected by voting members has the benefit of being more democratic in nature. In addition, membership classes can be structured to permit representation of various stakeholder groups.

Voting membership in a nonprofit corporation also confers certain rights and privileges under state law. For example, voting members have statutory rights to certain corporate information and, the ability to bring lawsuits to enforce the corporation’s rights. However, these rights can be exploited to permit a group with a strong ideology to assume a leadership role in a nonprofit and radically change the nonprofit corporation’s  direction.  The Sierra Club faced just such a takeover attempt by ideologically motivated groups in 2004.  Accordingly, a voting membership structure should not be created lightly.

Organizations that elect their boards by member vote must also contend with the additional complexity of separately documenting two sets of meetings including notices, waivers, votes, resolutions, delegations,   etc.

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. For this reason, many nonprofit subsidiaries are created with the parent corporation as the sole corporate member of the subsidiary.

Board Appointed by Third-Party. Many states allow the bylaws to specify a third party that is permitted to directly appoint one or more board members. This option can be used to provide board representation to stakeholder groups without the added complexity of a voting membership structure.

Some Combination of the Above.  Most nonprofit corporation statutes permit any number of combinations and permutations of the above. These hybrid structures can be further combined with reserved powers, super majority vote requirements, and voting trusts to further refine and balance the interests of various stakeholders.

While it is possible under most state law statutes to create a structure that confers control of a nonprofit corporation that is tantamount to ownership, if the organization is a public charity and the control group represents private interests, expect strong push back from the IRS.

While there is no statutory authority for this position, it is the author’s experience that the IRS is suspicious of any charity that is tightly controlled by any one family, business, or related group.

[1] There are some states that permit nonprofit corporations to issue stock and some relatively rare situations that require stock ownership; however, in the vast majority of cases, no one owns a nonprofit corporation.

18 thoughts on “Who Owns a Nonprofit Corporation?

  1. I want to start a nonprofit for our martial arts academy. I am worried though that there would be a way to take the academy away from me if a board or someone decides to and then I would lose the business I have built for 10 years. Any suggestions?

  2. Pingback: Nonprofit Bylaws: What to Include and What to Leave Out | Brokers for Charity's Nonprofit Giving Blog
  3. The board of directors of the newly incorporated not for profit has taken complete control, does not allow members any voting rights by members on by laws or amendments, an, restricts club members from voting on elections of new officers. How can I find out if this is legal in our state (Illinois).
    Thank you.

  4. I’m a manager of a np. The “owner” as he states cuz it was his finances that helped open the doors has created a board of himself, his wife and his son and one close friend. Is that legal? Also he has created a very hostile environment for the employees. Is there a way to do a take over? Or what exactly are the rights of paid employees? Do I have any ability to change the entire board?

  5. If a non-profit is formed with a single member parent that is also a non-profit, how can that member transfer its membership to another entity? the parent non-profit is having serious financial difficulties and the non-profit child is fine, but needs to get a different single member owner/controller….. what happens if the single member parent dissolves?

  6. Our organization is the current victim of a coup d’etat; we are small but mighty. We have been fighting off the board for the past 4 months. They’ve closed out our bank accounts; committed a breaking and entry crime to access the building; they’ve harassed stakeholders and slandered the E.D. and staff.
    It’s been one helluva mess! Thanks for your article.

  7. I’m a director of a 5000 member nonprofit where the members elect the dirctors, where the members have the power to remove all or any directors with or without cause,and where the members have exclusive voting control over amending, adopting, repealing the bylaws.

    I have a hard time explaining my belief that these members are in ultiate control — and I havn’t found any analysis to support my thought.

    To me it seems obvious, But the other directors don’t agre and think that while I owe loyalty to the nonprofit, I don’t owe loyaly to the collecive memership

  8. I would also appreciate an answer to Ashley’s question concerning the founder being a voting board member. I started our non-profit in 1999 and our by-laws specifically included me as a voting member. The by-laws need to be reviewed and updated and I am very reluctant to change my status since it was my money that started it and kept it going for the first 3 years.

  9. Your website was very helpful however I have a few more questions. The first being, can a founder of the nonprofit be a voting member or is that conflict of interest. My second question is when new members are voted on to the board do they then become voting members or not? Thanks!

  10. Great article and website. I have a Q re: non-profit private schools. My son’s school which is in southern california is currently in turmoil over issues related to the superintendent. He has since quit but I really want to get the bylaws to futher look into the school. Does the school HAVE to provide me a copy of the bylaws? Any info you can provide will be very helpful.

  11. I’m working with a young nonprofit that’s taking on the ambitious and possibly audacious task of creating a data bank of sensitive personal data that can be released without violating privacy for research and public policy. Obviously, we need to be really, really trustworthy. We’ve been thinking about how best to create our governance infrastructure, and whether there’s a way to create a system of checks and balances, where authority is distributed and transparency is paramount so that there are many eyes watching. We’ve posted some of our thoughts on our blog, http://blog.myplaceinthecrowd.org/2010/06/03/governing-the-datatrust-answering-the-question-why-should-i-trust-you-with-my-data/, as well as our website, and would appreciate any feedback.

  12. Another benefit of the self-perpetuating board is that they can determine who will be nominated and elected to the board. As organizations develop and mature, boards need people with skills and experiences that are aligned with the needs of the organization…today and tomorrow. This is an advantage, of course, if boards desire to grow and develop.

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