Who Owns a Nonprofit?
I believe in coincidence—not that it is a sign from some higher power sending some message, but rather that I should look at the confluence of ideas and ask: what is going on here? Is there a trend brewing? The trend I’ve been seeing lately is about the ownership of a nonprofit.
First: no one—not the founder, the current executive director, the board, no one—owns a nonprofit. Nonprofits exist for the benefit of the public good, working on behalf of some portion of that public good. No matter how hard you might have worked to get that nonprofit off the ground or to keep it running, it isn’t yours. And it doesn’t belong to board members, either, who are there as the protectors of that public trust and must exercise their responsibilities to keep that trust. (Sometimes that means replacing the founder—but that is another blog).
Second, you cannot “buy” another organization’s charitable status and use it for your own charitable purposes. You can’t do this no matter what the condition of the nonprofit. It simply isn’t for sale. The IRS makes a determination of whether an applicant with a specific mission fits the criteria of a nonprofit and then, should it award nonprofit status, is doing so with the understanding that the nonprofit will execute that, and only that mission. Can one nonprofit merge with another? Absolutely. But that, too, is another blog.
Third, you can’t “sell” your nonprofit. You can’t sell what isn’t yours in the first place. Furthermore, the assets of a nonprofit—the property, goods, money, etc.—belong to the mission, if you will: they have all been acquired with the understanding that they will be used to further the mission of that organization. End of story. Thus, those assets must be used for charitable purposes. So, if you’re tired of operating the nonprofit, get another job, merge the organization with another charitable organization and then get another job. But selling?
Passion and great intentions are all wonderful and very much needed in the world of nonprofits. But understand the law and how to run a nonprofit before you enter into this world.
Excellent article! In my personal experience, I have observed board members and other executives who lived on both sides of that understanding of what a nonprofit is and how its assets are to be used. Fortunately, the good ones outnumber the bad.
Nicely put, Laura, and yet another reminder of why nonprofits, for all their wonderful and worthy idealism, need to invest time and resources in the business side of their ventures.
I totally agree that no one owns a nonprofit, and that it should be run as any other good business would, however the directors should make sure that every one that has any kind of association understands the mission very clearly. I believe that when the mission is clear and the leadership and business practices are sound then success can be achieved. This was a very insightful blog. Way to go Laura!
Excellent post! I am going to refer
my clients to this!
-Kathleen Aguilar, attorney
This was very helpful. I’m working on a business plan and I really needed clarification on this topic. THANKS!
Thanks for this.
It is quite idealistic, however. I am wondering if you could answer about practical logistics a bit more?
I’m considering starting a non-profit. However, I am hesitant that this may lock us into a certain model of operating which won’t suit us in the future:
Say you had a non-profit serving a perticular goal. Context changes and then it becomes more appropriate to meet that goal by transforming the organisation into a different type of entity
—like a socially conscious profitable venture (for the purposes of making sure employees are paid well so that the said goal can be achived with more financial sustainability and not burn out the workers making it happen)
—or a worker owned co-op,
—or just to be more politically active than current laws regarding non-profits limit us to.
Would it be possible to transfer assets of this non-profit to a reformulated entity that shared the same ideals/goals/mission/maybe even people as the original non-profit? You have mentioned merging with another non-profit. Is it possible to merge with something that isn’t a non-profit exactly?
Thanks for all your insight!
Dr. Otten
I’ve recently become involved in a campaign to save a non-profit from having its operations suspended by its board of directors. I asked myself, is the board truly empowered to direct such a course of action? If the entity is operating effectively, and providing its intended public purpose, can the board simply decide to suspend operations with no regard to input from other stakeholders? Is there any basis for legally challenging the board’s decision? Thank you.
A.J. Smith
In answer to A.J. Smith’s comment:
Allan, I’m thinking you aren’t going to like my answer.
The short answer to your question, now that I have read the president’s letter and visited the two websites you sent me, is yes, the board has the authority to suspend operations. The only thing that could contradict this is if there is something in the bylaws that forbids such an action. Never having seen such a clause in any set of bylaws (and I’ve read hundreds, if not into the thousands by now), I’m skeptical that such a clause exists. The board is the protector and steward of the mission. As such, the board has the responsibility to do what is necessary and best for delivering on those promises.
If it determines that it is necessary to suspend operations in order to focus on what the organization should be doing in the future in order to fulfill those mission promises, then it can do so. There certainly are examples of this from the funding world, where a funder suspends its new grant process (continuing to fulfill its multiyear grant obligations) while it engages in a comprehensive process to determine what its new priorities should be. We don’t often see this with direct service nonprofits as the thinking is that their clients cannot afford to go months or a year without being served.
So, now for the more complicated, and longer, answer to your question, as I’ve no doubt you are not thrilled with the answer so far. The decision that was made is not one that a responsible board makes lightly. To the outsider who is not privy to all of the information, documents, etc., that the board receives, s/he may perceive the decision to be a rather rash one.
but I have to assume–and I would encourage you to find out more–that the board had information that was not available to you, even though you are member of the organization’s immediate community, that lead them to reach this conclusion: that in order for the organization to be able sustainable for the long-term, a short-term hiatus needed to be taken.
Maybe the financial health of the organization is not well or interest in the programs have begun to tank or merger discussions are about to happen, or who knows what. but I have to believe that this decision did not come out of thin air. And, iIwould like to assume that in its deliberative process, the board did consult with its various stakeholder groups, from students to alumni to parents to educators, to collaborators, etc. while not required by law (unless, again, the bylaws have something to say), this is absolutely a best practice.
If the board has inside information that suggests that its programs and services are not fulfilling its mission promises, not meeting the needs of current high school students,etc. then to continue to offer those programs would not be a good exercise of one’s fiduciary responsibilities. But might there be a compromise position between suspending all programs and doing something? Sure.
Can you challenge this decision? Sure, there are lawyers who will take up anything these days. Is it a good use of your time and dollars, that I can’t say. But there are examples of boards deciding to do something and their constituent bases organizing letter-writing campaigns, protests, media campaigns, asking for an “audience”, etc. so, that is another option. Is it reasonable for you and others–especially alumni, parents of alumni, educators of alumni, financial backers–to want a fuller explanation of what is going on? absolutely. Is it legally required? absolutely not. so, even though I have not given you the expeditious recourse that you have to stop the suspension, I would absolutely not discourage you from continuing to make noise, gain a fuller understanding of the circumstances, etc.
One final thing: too often members of boards who come from the corporate arena forget that they are in the nonprofit sector where are cultural norms and ways of doing things are different. For one, we tend to be much more democratic and inclusive. It would be ironic if the organization called presidential classroom forgot that.
Boards do not own a nonprofit, but they are the holders of the public trust for that nonprofit. And as such, they are responsible for ensuring that the organization lives up to what it says it will do as stated and implied in the mission. Your board has taken a rather drastic measure in order to be able to do just that. I think the next question you should be asking–and want to answer–is whether such a drastic measure was truly necessary.
Very good points i think you really need to understand what a non profit is all about. A lot of people should be starting a for profit business instead of a true non profit organization.
In a lot of ways starting a non profit is much harder then starting and running a normal business.