I have formed a nonprofit charitable corporation but have not yet filed a Form 1023 application for exemption. I am currently the sole and initial director of the board. My state permits a single member board, and there are no other board members yet, as it will probably take me a while to put together the board I want. Is the IRS likely to have a problem with using my current sole/initial director authority to authorize taking clients and operating the nonprofit prior to establishing the full board? I think it will be easier to attract quality board members once we have a short track record and the nonprofit seems organized and less abstract.
The IRS is always skeptical of a sole governing person at a charitable organization, but it is not illegal or necessarily improper. The fundamental question is what the organization will or does do and whether it is being used for improper personal benefit of the single person. You may be able to blunt that skepticism with a clear track record that clients are getting real services, at fair market prices or less, and that you are not making an unreasonable salary or getting other improper benefits.
I am not sure you are asking the right question about the governance, however. It sounds as though, when you get the additional directors, you will be just one of a group of directors who will have the power and authority to remove you if they don’t like the way you are leading the organization. If you are starting this organization as your chance to change the world, or if you want to be able to spend your career working on these issues that you think are important, we suggest that you consider switching to a “sole member” corporation in which you, as the sole member (which is essentially equivalent to the sole shareholder of a business) have the power to select — and remove — the directors of the organization. (See Ready Reference Page: “Sole Member Bylaws Can Protect Founder of Nonprofit”) We have seen too many situations in which a founder has worked for years to get the organization up and running, only to have a board (composed of the founder’s good friends) say it’s time to go in a different direction and “you’re fired.”
You won’t be able to act arbitrarily in firing directors who don’t agree with you or you won’t be able to attract good people to help. But you will be able to sleep soundly at night, knowing that nobody else can tell you that you can’t pursue your dream.
Is Pennsylvania a state that allows founders to be protected by "sole member bylaws"?
Yes. Although this is a matter of state law, I am not aware of any state that prohibits a sole member. New York will not allow the board chair to be an employee of the organization, but apparently does not prohibit an employee from being on the board, as most sole member founders would want to be. --Don Kramer
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