You are here

Is board “independent” in sole member corporation?

Your Legal Questions Answered

Is board “independent” in sole member corporation?

I can imagine many situations in which a founder or two founders would prefer a structure in which they are able to retain that final word as legal members of the corporation. But if a founder is the sole member of the corporation (or one of two), how can she also be a paid executive director of the corporation? Even if she recuses herself when compensation is discussed, wouldn’t the threat of being kicked off the board by the legal member(s) mean that the board is never really independent?

We have no problem with a founder being the paid CEO.  If one of the main reasons to have a sole member corporation is to preserve the founder’s vision for the organization, the founder’s serving as CEO to pursue that vision can be critical.

Even if the directors are appointed by the sole member(s), the law is clear that their fiduciary duty is to the corporation, not to the founder(s). (See “State Can’t Force Foundation to Contribute for State Programs, Nonprofit Issues® 1/16/05) As a practical matter, the directors may be influenced by the fact that they serve at the pleasure of the founder(s), but their duty is still to the corporation.  Paying the founder a reasonable, but not excessive, compensation is part of that duty. 

The issue is more likely to come up in the context of excess benefits, because the safe harbor rules published by the IRS require that compensation be approved by an “independent” group on the board in order to obtain the “rebuttable presumption” of reasonableness.  (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions”) A board appointed by the founder(s) would not technically be independent.  The board could, however, appoint an independent advisory committee that would be tasked with assuring that the compensation is reasonable, or could appoint an independent consulting group to give an opinion.  Neither of these choices would be required if the compensation is objectively reasonable.  The lack of independence might just require slightly more specific proof if the IRS came looking.

Tuesday, July 21, 2020


Thank you.

Add new comment

Sign-up for our weekly Q&A; get a free report on electioneering