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How can two founders become the “sole member”?

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How can two founders become the “sole member”?

As two founders who want to start a nonprofit and maintain “sole member” control, do we need to create a separate legal entity that will serve as the single member and then incorporate the nonprofit?  Or do we just incorporate the nonprofit as step one and simply state in the bylaws that the two individuals are the sole member? 

The issue with two “sole members” is very simple.  We can protect you from the rest of the world.   We can provide that the friends you name as directors can’t force you out, and that you can remove any of them if you need to.  But we can’t protect you from yourselves. 

You would have the same issue whether you created a separate entity to be the sole member, or simply set up the nonprofit and declared yourselves the only members.  If you deadlock in either form, you will be unable to act and may have to go to court to break the deadlock. 

The membership form can be used to protect the founder or any number of founders of a nonprofit.  (See Ready Reference Page: “Sole Member Bylaws Can Protect Founder of Nonprofit”) It is less effective for multiple founders who can’t agree on things.  With two founders, there is an automatic deadlock if you disagree.  With more founders, if you require unanimity for decisions it may be even more likely to cause a deadlock.  But if you can decide by majority or super-majority vote, the minority has very little protection and could possibly even be forced out of the organization. 

This isn’t a reason not to try to protect yourselves. We worked with one pair who simply agreed that if either had a strong disagreement with a proposal, they wouldn’t do it.  It worked well the entire time they ran the organization.  Let’s just hope that your relationship never comes to deadlock.

Tuesday, May 30, 2017

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