Starting any kind of business is a risky endeavor. 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.

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But there is a nonprofit governance model that can address some of these concerns: the Sole-Member Nonprofit. This e-book will explain what it is, how it works, and how Foundation Group can help you establish one the right way.

First, let's define the problem. I think you will appreciate this discussion more if we fully establish the issues-at-hand before presenting the solution.

As experts in the field of nonprofit formation, we've worked with tens of thousands of startup organizations, and we've seen every scenario and structure you can imagine. Some 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 ready to spend. These nonprofits launch large and have immediate impact. The risk to any one individual is relatively small, and the board hires staff members to run the day-to-day operations. It runs like a well-oiled machine from day one!

But the reality is that startups like I just described are the exception, NOT the norm. There's an even larger group of startups that don't look like that at all.

Most nonprofits are relatively small. They are started and run by passionate individuals or families who see a need and decide to tackle it. There's very little difference between them and the average small business startup. 

 Legally, there are huge differences. But operationally...not so much.

The founder of your typical small, community nonprofit will recruit some good board members who can help them govern this new venture, but it's the founder who often serves as the board President and is the primary person who puts in the long hours to make it all happen as the ultimate social entrepreneur.

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.​

If this sounds an awful lot like someone starting their own business, then you are absolutely following where I'm going.

Now, this social entrepreneur could start a private foundation, and that's fine under the right circumstances. A private foundation is a 501(c)(3) after all, and it has the benefit of being allowed to have a closely-held board of directors, such as members of one family.

The problem is that private foundations aren't really designed for conducting charitable programs. They're better suited for grant-making. Plus, as a private foundation, the founder probably cannot draw a salary because of the strict IRS rules on self-dealing in foundations.

So, a private foundation may actually be a very poor choice for a nonprofit with active programs, particularly in situations where the founder intends to work for the nonprofit as an employee.

So what's left? The obvious and most preferable choice is a public charity.

But in exchange for the favorable 501(c)(3) status that comes with being a public charity, the IRS expects your nonprofit to be governed by a group of independent individuals, a majority of whom are not directly related to you by blood, marriage, or outside business ownership. The biggest problem in this setup is that the founder is but one vote among all the other board members.

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

How fair is that?

Sometimes it might be fair. Sometimes the founder has worn out their welcome and has actually become a liability to the nonprofit's future.

But if I'm honest, that's not how it usually works. Most of the time, it's an ugly spectacle. The founder gets kicked to the curb with nothing to show for their efforts, and the nonprofit crashes and burns within another couple of years. It's a movie we've seen way too many times.

​All nonprofits, including public charity 501(c)(3)s, are required to have a board of directors. Some organizations also have a voting membership that participates in governance. You've likely seen nonprofits like this. You may have even been a member of one. 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. But, it's the members who nominate and elect the board who will represent them. Typically, the board will hold periodic meetings of the membership (at least annually) to update the members about the prior year's financial activity and accomplishments, plus plans and budgets for the future. Another big part of a member meeting is the election of new directors for those whose term is expiring.

A sole-member nonprofit is a unique version of this membership-governed public charity, where the membership is made up of one, permanent member, usually the founder. The nonprofit still needs to seat a board of directors, but the founder can (and should!) include themselves as one of the board members.​

So what's the benefit of this structure? The most obvious benefit is the degree of protection provided to a founder who has risked so much to start the nonprofit in the first place.

As I just mentioned, in a sole-member nonprofit, the board of directors is still the primary governing body. But, if the organization is set up correctly, and its Articles of Incorporation and Bylaws are properly written, the board members are recruited and elected by the sole member and effectively serve at the pleasure of that member.

Plus, membership can be setup to be essentially permanent. Even in the unlikely event the board removed the sole member from the board, the member cannot be removed from membership unless for illegal activity.

OK, I've talked about the benefits. So now let me be equally as candid about the downsides. Sole member nonprofits are not without their problems.

The biggest downside risk is tunnel vision, or founder's syndrome. You simply won't find many successful nonprofits...or companies for that matter...that are controlled by one person who rules with an iron fist. You don't even have to have a sole member nonprofit to see this. Many small nonprofits already 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 is the difficulty in keeping good board members. If a sole member treats board members as nothing more than legally-required placeholders who can be booted on a whim, good luck finding anyone else willing to serve.

Why would they?

One more issue is that this structure isn't legal everywhere. At the time of this writing, New York and Virginia, in particular, require more than one member to incorporate a public charity in their state.

But one way around this obstacle is a small, closely-held membership instead of one member.

Another potential solution for a New York or Virginia charity is to incorporate a sole-member nonprofit in one of the other 48 states that allow it, then get permission from the home state to operate a physical location there as a foreign-state corporation.

The important point is that this structure can be utilized virtually anywhere in the US, given the right things in place.

Here's the best scenario: 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 your board members fulfill their intended role to provide advice and consent, and you allow your ideas and methods to be challenged and improved upon to make your nonprofit the best and most effective organization it can be.

And finally, you are totally committed to running your new sole-member 501(c)(3) in a manner fully-compliant with state and federal law.

If that sounds like you, then maybe you are a great candidate for starting a sole-member nonprofit!

Sole-member nonprofits can be an incredibly effective way to accomplish something great for your community, while also protecting the founder who is putting it all on the line to make it happen.

A word of caution: Sole-member nonprofits aren't necessarily complicated to operate, but they are complicated to set up.

Foundation Group has worked with hundreds of nonprofit founders in setting up these sole-member public charity structures. We know how each state governs these entities, and how to best establish your new 501(c)(3) to manage your risk, and to do so in a fully-compliant manner.

Trust the experts to help make it happen for you!​