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May sole director dissolve nonprofit over objections of members?

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May sole director dissolve nonprofit over objections of members?

May a single member board dissolve a nonprofit corporation against the wishes of a majority NO vote from the organization’s members? Then that single board president took the entirety of the members’ funds accrued over 30 years and gave it to a new for-profit Limited Liability Company, of which the former president stands to be the majority profiter. Sound legal?  

The first part of your question is a matter of state nonprofit corporation law.   Not all states permit a single person to comprise the board of a nonprofit corporation.  If that is not permitted in your state, the sole director can’t do much of anything, except perhaps appoint additional directors to bring the board up to the level required by the state law or your bylaws.  The members themselves may have the power to add new directors more sympathetic to their views.

If your state does allow a sole director, there is still a question whether the sole director (or even a multiple member board of directors) can approve a dissolution without the approval of voting members.  Most states require member approval for fundamental changes such as this.  If either limitation is applicable, you may be able to sue to reverse the transaction with the LLC.

If the sole director has the power to dissolve and also determine where the net remaining assets go, it still doesn’t sound appropriate.  If the corporation is a charity, the net remaining assets have to be used for other charitable purposes under federal tax law and probably under state common law.  The IRS and your state attorney general would have an interest in preventing your organization from doing otherwise.  Even if the sole director has authority to determine what happens to the remaining funds, it sounds like a breach of fiduciary, if not outright theft, to direct it to a for-profit from which the sole director is likely to profit personally.  If your nonprofit is a social club, that money could be available to the members. 

Check with a local lawyer familiar with nonprofit law in your state to see exactly what your rights may be.  Depending on the amount involved, the local prosecutor or state attorney general may be willing to spearhead the pursuit of these funds.

Tuesday, September 6, 2022

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