sole-member-nonprofit

Our Guide to Starting a Sole Member Nonprofit: When, Why, and How

avatar-image
Jules

You have read what feels like every publication on how to start a nonprofit. But now you have to decide how to structure your organization. 

First off, the federal law requires that all nonprofits have a board of directors with at least three members. The individuals on this committee should have the experience to help you work toward your nonprofit’s vision statement

You can set up your board in different ways based on your goals. One structure that the passionate founder with a specific vision often goes for is the "sole member nonprofit."

Read this guide to discover:

Let’s go!

No time to read this article now? Download it for later.

sole-member-nonprofit-what-is

What Is a Sole Member Nonprofit?

Historically, nonprofits have had a structure that closely resembled a corporation. This meant that members of the corporation or nonprofit would vote to remove, appoint, or replace board members. Modern nonprofits, however, are now primarily structured in a self-sustaining way. Therefore, the board members make the decision to remove old directors and bring in new ones. 

Outside of these two structures, though, there is a third option — and this is called a "sole member nonprofit."

A sole member nonprofit is a type of charitable organization where a single individual or corporation is the "sole member." This means that this one entity observes the right to appoint or remove members to the board. Of the different types of nonprofits, this structure is especially useful in situations where individuals want to maintain tight control over the nonprofit and its activities.

Pro Tip: Perform a nonprofit needs assessment to better determine what type of nonprofit is going to work for you and your goals. Check out our questions to ask a nonprofit organization to help you work out the details of who you want to serve, how you are going to serve them, and more.

sole-member-nonprofit-when-and-why

When and Why To Start a Sole Member Nonprofit

A sole member nonprofit is most appealing to a founder who wants to maintain control of their organization and keep the board from veering into a territory that is not explicitly inherent to their original vision. There are also times when it makes good business sense for a large organization to set up or merge with a sole member nonprofit. We explore both of these scenarios below.

sole-member-nonprofit-when-and-whySadie is pondering if she should start a sole member nonprofit...

Scenario #1: Long-Time Control

The founder of a nonprofit has the clearest vision of the organization’s mission. By establishing themselves as a sole member, the founder has the power to appoint or remove board members and veto board decisions, which gives them indefinite control over the nonprofit’s operations. 

Scenario #2: No Liability

A larger LLC may want to step in and take over a smaller nonprofit to offer it the administrative and financial resources it needs to succeed. If the smaller nonprofit uses a sole member structure, the organizations are legally two separate entities. This way, both organizations retain their strong brands. The larger nonprofit is not liable for any decisions that the smaller nonprofit makes either.

Down the line, the two organizations could decide to merge into one mega organization. This intermediary step with the sole member nonprofit as the subsidiary of the large organization is a way to test the waters before pulling the trigger.

Another similar scenario is when a large organization starts a small sole member organization from scratch. Maybe the organization finds a niche market that is indirectly related to its current operations. With a sole owner nonprofit, it can reach this marketplace without being liable for it or weakening its brand.

sole-member-nonprofit-drawbacks

Drawbacks of a Sole Member Nonprofit

A sole member nonprofit corporation is not without its drawbacks. If you choose to move forward with this structure, be aware that society and regulators sometimes frown upon these types of LLCs for a number of reasons.

Tunnel Vision

The biggest pitfall to a sole member structure is the risk of the organization developing tunnel vision. In this outcome, the founder runs the nonprofit like a dictatorship, where they have total say in what the organization does while the board of directors does nothing but watch.

Board Member Recruitment

As a founder with a vision for improvement in your community, you want your board members’ help. It can be hard to find new board members with the right qualifications if they do not have an active voice and presence in the nonprofit’s decision making and governance. After all, there is little benefit to being a body meant to fulfill legal requirements.

Stakeholder Confusion

Donors, volunteers, and other stakeholders want to know about the organization that they are supporting. They expect crystal clear transparency as an assurance that the organization is using its resources responsibly. They may be upset when they call a board member who they found on the "About Us" or "Meet the Team" tab of your website, only to discover that there is an additional unknown figure making the decisions.

sole-member-nonprofit-drawbacksNancy is up for the challenge of a creating sole member nonprofit!

State Legality

Some states have strict qualifications for organizations to meet in order to reach state tax exemption and nonprofit status. Although there are no federal requirements on the matter, some states require 501c3 charitable organizations to have more than one member. Some of these states include:

  • Alabama

  • Connecticut

  • District of Columbia

  • Florida

  • Illinois

  • Indiana

  • Kentucky

  • Maine

  • Michigan

  • New Jersey

  • New York

  • Texas

Pro Tip: How can a sole member nonprofit in California differ from a single-member LLC in Indiana? Make sure you research all of the state requirements on how to register a nonprofit before you break ground!

sole-member-nonprofit-how-to-start

How To Start an Effective Sole Member Nonprofit

After you have the basics covered, such as choosing a name for your nonprofit organization, you need to file a 501c3 application form in order for the IRS to grant you federal tax-exempt status.

Upon completing all of your bureaucratic documents and duties to meet the qualifications for tax exemption, you need to establish some bylaws for how your organization is going to run. These well-written bylaws will serve as guidelines to protect your new sole member nonprofit from some of the previously discussed drawbacks if you consider the following.

Limited Removal Rights

State in a section of your bylaws that you as the founder can only remove board members in select cases. Establish boundaries for acceptable scenarios, such as requiring that there be cause for removal. 

It is also possible to require a board vote for removal, where a majority of the members agree with your decision. With a certain amount of protection in place from your power, board members will feel more comfortable freely speaking their minds.

Independent Board Members

Leave certain board seats open for independent board members. The sole member does not appoint these board members. Typically, current board members nominate them, and the rest of the committee votes on whether to elect them and how long of a term limit to give them.

sole-member-nonprofit-how-to-startEmily has learned a lot about sole member nonprofits!

The number of independent members on a board is usually a small minority, but these members contribute invaluable criticism from an outside perspective on the organization’s performance and direction.

Clear Advertising

To avoid stakeholder and staff confusion, make sure that you use your website to clearly lay out what the structure of your organization is. Donors and volunteers want to know where their money and time is going. Your staff members also want clarity on where their directives and notices come down from.

Pro Tip: Did you know that many nonprofits operate on an annual budget of less than $50,000 per year? Check out how to start a nonprofit organization with no money if you have ever wondered how much it costs to start a nonprofit. Though the initial fee can be quite high, you can get around it if you are crafty!

sole-member-nonprofit-final-thoughts

Final Thoughts

A sole member nonprofit structure is popular among founders who want to retain long-time control of their organization or who want to take on another organization with no liability. While there is the potential for drawbacks, you can mitigate or limit them with carefully written bylaws and transparent internal and external communication. As you create your nonprofit, study the case for whether a sole member structure is right for you!

Enjoyed the article? Download it to keep or share with others!

sole-member-nonprofit-end

FAQ

💡Can a nonprofit have only one member?

Yes. A nonprofit can have only one member. This type of nonprofit is called a sole member nonprofit. Find out more. 

🔑 Can a nonprofit have only one board member?

No. A nonprofit cannot have only one board member. The law requires that every nonprofit have a board with at least three directors, even if it is structured as a sole member nonprofit. Find out more. 

📝 Why would I want to start a sole member nonprofit?

Some founders start a sole member nonprofit so that they can maintain a clear vision by having control over it in the long term. This type of nonprofit is also useful for a larger nonprofit that wants to acquire or start a smaller nonprofit without being liable for it. Find out more.

 

Organization & HR
avatar-image
Jules
The Holy Grail of Nonprofit Tips ✨
Get all of the information you need to efficiently manage your nonprofit with our monthly newsletter.

What to Do Before Buying a Membership Database Software

16 min read
Trish

A Detailed Breakdown Of Nonprofit Accounting Basics

10 min read
Trish

How to Build the Perfect Nonprofit Board of Directors

5 min read
Danica