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Will founder lose control if he forms a 501(c)(3)?

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Will founder lose control if he forms a 501(c)(3)?

The founder of a company is hard-pressed to determine what type of company he actually wants to have. He does not want to claim charitable nonprofit status and file the appropriate 501(c)(3) paperwork because he fears that when voting in board members he will be voted "out" and the company will be taken away from him. If he does not do the 501(c)(3), will it be considered a for-profit company and have to pay taxes? The company has been formed to raise funds for a particular disabling disease.

The purpose and anticipated funding of the organization should determine what type of tax status the founder should use, not the issue of control.  If it is formed for a charitable purpose and is likely to be able to obtain charitable contributions that would not be available to a taxable corporation, he should definitely consider the (c)(3) application.  If he does not obtain recognition of exemption, he will ultimately be taxed on the surplus income.

The founder is correct to be concerned about maintaining control of the organization.  I was talking with a client recently who was telling me there were so many founders in her town who had lost control of their corporations that they had formed their own organization to keep it from happening again.  But there is a way to deal with the issue, by forming a membership nonprofit where the founder is the sole member and has the right to select and remove the directors on the board.  (See Ready Reference Page:  “Sole Member Bylaws Can Protect Founder of Nonprofit”

We are aware that many commentators think it is a terrible idea from the public’s point of view, and that the IRS has some skepticism, although it has no basis on which to deny exemption on that fact alone.  But we have found that many social entrepreneurs who want to assure that they can pursue their vision without fear of losing control think it is a pretty neat idea.

Tuesday, October 21, 2014


The only circumstance that I can envision whereupon a founder loses "control" would be as a result of the board losing confidence in the founder's ability to effectively grow the organization. Looking for a way to "have your cake and eat it too" strikes me as being self-centered.

Another circumstance in which a founder could lose control is where the founder had built the organization so that it had a large treasury that his/her friends thought they could spend in a way more to their liking. It's amazing how interest can change when there is a lot of money at stake. You assume that the other directors have an interest in growing the organization more effectively. From actual experience, I have seen other directors fire the founder when they wanted to go in a different direction and had, by virtue of the founder's effort, sufficient assets to do it. —Don Kramer

Amen to Don Kramer's answer. Grabbing control of funds the founder has accumulated seems to be a very common motivation for the board to remove the founder.

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