Ask a Nonprofit Specialist: Legal protection of control within public charities
Question: I am the interested in starting a public charity, and I want to legally protect my influence and ability to control the affairs of the organization. How can I do this?
I get this question or some variation of it fairly regularly, and my response is a quite lengthy description on the nature of public charities and the reality that nonprofit organizations of this type do not have owners, by design, making it impossible to legally protect an individual’s control of an organization.
Short answer: You can’t.
Long answer: Public charities are an IRS designation of organizations that are organized and operated for exempt purposes. Exempt purposes can span a wide variety of activities intended to improve the common good. The organized and operated requirements for charitable organizations are very specific, including a prohibition of private benefit, so private ownership is not an option.
That being said, I can empathize with the desire to control the affairs of an organization as a founder who has the initiative and follow through to turn a vision into a reality. Like other successful entrepreneurs, social entrepreneurs have the will and skill set to get things done and the traditional public charity structure and requirements may seem like burdensome barriers to moving forward.
Burden or Opportunity?
Since public charities do not have owners, the accountable entity is its Board of Directors, which is vested with the legal and ethical responsibilities associated with this corporate structure. Is the requirement to operate with a Board of Directors a burden or an opportunity? Public charities, by design, have shared leadership, with all of its inherent strengths and weaknesses. In this case, shared leadership is intended to insure accountability to the common good. In addition, Boards of Directors serve as champions advancing the mission and activities of public charities, a role invaluable in the sector.
It’s a Tax Benefit
Public charities with a 501(c)3 designation enjoy substantial tax benefits. Not only is revenue exempt from income tax, donors are entitled to take a tax deduction for gifts to the organization. This benefit is provided in exchange for the exempt purpose and certain requirements and prohibitions in methods of operation. The most relevant here is the prohibition of private benefit and inurement to insure that a tax exempt organization serves a public benefit and not a private one. An independent Board of Directors with comprehensive conflict of interest policies and practices is the primary strategy for insuring there is not private benefit.
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Purpose, not Person
In a charity, the public interest served is paramount. Organizations effective in serving the public interest generally have strong leaders, but the leaders are not synonymous with the organizational purpose. The mission of an organization must be larger and independent from the person founding the organization.
Effective Organizational Development and Stakeholder Engagement
The only real way a founder can insure his or her vision is maintained is to undertake effective organizational development with engaged stakeholders. The vision must be meaningful and relevant and shared by multiple stakeholders. Founders need to well articulate their vision and involve others in developing plans to implement the mission. The more effective a founder is in leading an organization through this process, the more secure the vision will be.
Social entrepreneurs are implementing their visions in a variety of ways, and a configuration other than a public charity may be more appropriate to a founder’s goals. There are emerging structures that combine for-profit and nonprofit attributes, including:
Hybrid A link between a nonprofit and for-profit company where one entity fulfills a basic need for the other. In this structure, the for-profit arm operates with the rights and responsibilities of private ownership and the nonprofit conforms to the requirements of a tax exempt charity. The link between the two organizations must be carefully crafted and implemented to maintain accountability to tax exempt organization requirements. An example of this type of organization is a private health care provider with a nonprofit arm to serve indigent clients.
Benefit Corporation (B-Corps) A new type of corporation available in some states (including Arizona) where positive social impact is expected and non-financial interests are considered in decision making.B Corps report on social and environmental performance based on third party standards.B Corps provide an alternative to a corporate structure that requires profitability for shareholders as the first priority, replacing this priority with positive social impact.
Low-profit limited liability company (L3C) A new, for-profit business form available to social entrepreneurs in some states (not Arizona) who seek the flexibility of a traditional LLC while making a positive social impact. L3C’s are able to attract both private and foundation investments.
Fiscal Sponsorship A social entrepreneur may choose to align with a fiscal sponsor, instead of incorporating as a separate nonprofit organization. The fiscal sponsor maintains the tax exempt status, and while the sponsored organization must not engage in activities prohibited for tax exempt charities, there is likely more flexibility for founders in implementation than there might be with an independent organization.
The nonprofit sector is fortunate to include many amazing social entrepreneurs among our ranks, who have effectively worked within the structure and expectations of a public charity. Emerging trends provide opportunities for greater degrees of social impact and private ownership, but the fundamental answer to the question of how to “own” a public charity remains the same: Not possible!
At age 23, Anne Byrne was the founding executive director of Denver’s rape crisis center, an organization that continues to flourish today, over 28 years later. Byrne went on to build a nationally recognized, multi-site summer and after school tutoring program for inner city youth. With 25 years of experience as an executive director of emerging nonprofit organizations, Byrne, who is a Professional-in-Residence at the ASU Lodestar Center, brings valuable expertise and perspective to the "Ask a Nonprofit Specialist."