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What happens when sole member is incapacitated?

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What happens when sole member is incapacitated?

What language should be included in nonprofit bylaws to provide a plan of succession in the event that the founder of a sole member nonprofit corporation (who has exclusive authority to amend bylaws and appoint directors) dies or becomes incapacitated?

Whether or not specific language has to be included in the bylaws may depend upon the state nonprofit corporation law.  In Pennsylvania, for example, when there are no members in fact, the board has the authority to carry on all of the business of the organization.  Therefore, where the sole member intends to have a board, if the sole member dies or is incapacitated, the board can act.

We once heard of a corporation where the sole member was also the sole director.  After his death, someone “found” a piece of paper saying that his wife was also a director and the “problem” was solved.

It may make sense to make such authority clear in the bylaws, however.  It would be easy to provide that if the sole member died or became incapacitated the board could function as if there were no members.  Whether it would be permissible to provide that the sole member’s spouse or executor became the sole member upon death or incapacity may depend on the transferability of memberships under the state law.  It might also be possible to establish a separate class of membership for the spouse, executor and/or others.  The bylaws might provide that such class had no power until the death or incapacity of the sole member, at which time it would have all of the powers of membership.

If the bylaws specify that the sole member has veto power over amendments to governing documents (which might be done if the sole member contemplated adding members later), the bylaws ought to provide that the veto power applies only so long as the sole member continues to be a member.

Wednesday, June 3, 2009

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