“I own the organization, right?” recently asked the founder of a nonprofit organization during our initial consultation. Yikes! There are a couple of problems with this statement, but the most glaring issue stems from whether a founder’s interest is protected in an organization he or she formed.
The initial answer is no, no individual person owns a nonprofit organization. Folks intuitively understand that unlike their for-profit counterparts, nonprofits do not have shares, or other power structures found in traditional businesses. But still, someone has to be in charge, right? What this client really meant to ask is, “Am I in control?” And that precisely, is an excellent question.
Many understand nonprofits as operating under a board of directors. While that is one typical authority structure, it is not the only one available. Consider this example.
For most of his adult life, Mike has had a passion for helping underprivileged teenagers secure good jobs in the trades sector. Finally, after retirement, Mikes has the time and resources to devote towards starting an organization focused solely on partnering with employers and high schools in his community. Someone tells him he needs at least three board members in the State of Texas, and so he appoints as initial board members himself, the principal of one of the local school districts and the owner of the town’s successful car dealership.
Initially, the other board members were content with allowing Mike to lead the organization’s efforts. But eventually, disagreement over whether to include helping students attend a traditional 4-year university starts to mar the board’s otherwise-harmonious relationship. The bylaws provide that the board may have up to five directors, and gives each director’s vote equal weight, requiring only a majority vote to appoint new directors. The principal and dealership owner team up to nominate two other board members favorable to their position. Each new director is approved by a 2-1 vote, and all of a sudden, Mike is substantially outnumbered.
Now the board has the ability to move the organization in a direction Mike did not intend. Mike wanted for this organization to be his life’s legacy, his “second act.” But his vision was not protected when and in how the organization was structured. This happens all too often when founders do not understand the legal options available to them on the front end of setting up a new organization.
We can help talk you through various options, worst case scenarios and balance competing interests. Contact us today!