Nonprofit Corporation Members: Everything You Need to Know
Nonprofit corporation members have a say in any major decision the company makes.4 min read
Nonprofit corporation members have a say in any major decision the company makes. They are very similar to a business corporation's shareholders and have the right to do the following:
- Choose the corporation's directors.
- Vote on the merger, sale, or dissolution of the company.
- Make changes to bylaws and articles.
What Is a Nonprofit Corporation?
Unlike other corporations, nonprofit corporations do not have shareholders or owners. They can hire employees and pay their directors, but they do not pay dividends or issue stock.
Nonprofit corporations offer the same limited liability and asset protection features of a normal corporation. However, a nonprofit's main goal is not to make a profit. In fact, any profits made by a nonprofit organization have to go towards furthering the company's goals. They are not distributed to shareholders as dividends. The majority of a nonprofit's activities and transactions shouldn't be commercial in nature.
To qualify as a nonprofit organization under IRS rules — specifically 501(c)3 — a corporation must exist for one of the following purposes:
- Testing for public safety
- Preventing cruelty to children
- Fostering amateur sports competitions, whether international or national
Do All Nonprofit Corporations Have Members?
A nonprofit does not have to have members. Unless a nonprofit corporation chooses to have a membership structure, decisions will be made by the corporation's directors. This structure is often chosen for the sake of efficiency.
When a nonprofit is first formed, most decisions will be made by its founder and board members. Over time, the corporation may begin hiring employees to oversee operations, or it may opt for a membership structure that leaves decision making up to its voting members. One of the most important decisions to make when forming a nonprofit corporation is whether the organization will be member-driven or board-driven.
Member-Driven vs. Board-Driven Structures
A nonprofit corporation can choose to be governed by a set of voting members or by a self-perpetuating board.
In a member-driven organization, members can vote on changes to the board of directors and adding or removing individuals from the board. This works well for organizations who want a democratic structure where each member has a say in what happens. The following types of nonprofits are typically member-driven since their primary goal is to serve their members:
- Chambers of commerce
- Social clubs
- Trade associations
A board-driven organization has no members or members with limited rights. If a corporation does not have a membership structure, its board will be self-perpetuating instead of being elected by members. In this setup, board members elect their replacements themselves, and the board of directors is the highest authority in the nonprofit corporation. They will make all of the major company decisions, while day-to-day operations are overseen by officers such as a secretary, treasurer, and president. Most charities choose a board-driven structure.
It is possible for an organization to have non-voting members and still be governed by a self-perpetuating board. In this case, members may receive certain benefits in exchange for paying dues — such as free admission and gift shop discounts for becoming a member of a museum — but do not have voting rights.
Disadvantages of a Membership Structure
Before choosing a membership structure, nonprofit corporations should consider the potential downsides:
- Voting members have certain rights under state law that give them a lot of control over a corporation. If your corporation will have members, it is important to spell out their rights so that you don't create voting members unintentionally.
- A membership structure is difficult to undo. Once you have established members, it may be impossible to remove them without their consent.
- Voting members make governing a nonprofit more complicated. Instead of simply keeping track of board of director meetings, you will also have to maintain up-to-date rosters of voting members and records of their meetings.
- Corporations with voting members can be less stable. If you set the bar for membership too low, it can be easy for factions to develop and change a nonprofit's entire direction. All they have to do is sign up more members who agree with them until they have enough votes to see their vision through.
A highly publicized example of the last issue played out at the Sierra Club. Although most of the club's oldest supporters were against an anti-immigration agenda, the faction pushing for it nearly succeeded. Supporters were encouraged to pay their $25 so that they would be eligible to vote at the annual membership meeting. Ultimately, the attempted takeover was unsuccessful, but it was a good reminder of what can happen.
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