{UAH} Response to KWESIGA: Nonprofit Law Basics: Who Owns a Nonprofit?
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6:49 PM |
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Mr Kwesiga, the article that you posted below, gives a WRONG impression that UNAA leaders are NOT accountable to UNAA members (and thus can't sue them?). To be clear, your article reflects the law as it was over 50 years ago.
It is true that nonprofit corporations generally do not have a class of persons with a sufficiently significant financial interest in the operation of the corporation to bring a derivative or class action suit. However, where a nonprofit corporation has members (e.g UNAA, various professional associations like American Bar Association, American Medical Association, etc), the directors and officers do have duties to the members and may be liable for breaches of those duties.
Today, the duties of a director or officer to the membership of a nonprofit corporation are, for the most part, encompassed within the general duty of loyalty and care owed to the corporation itself.
In the past, the full control of directors and managers of nonprofits was entrusted to the Attorney General of a given state. Members of the nonprofit were held not to have standing due to a lack of financial interest in the corporation (as your article points out, lack of financial interest was assumed based on the rule that profits derived from the operation of a nonprofit may not inure to the benefit of its members.) Since the members were assumed to have no financial interest, the common law reasoned they had no standing to sue the corporation. Because the interest that members of mutual benefit corporations (such as UNAA, clubs and professional trade associates) have in the proper operation of the corporation is now widely recognized, many states now allow derivative suits to be brought against directors and officers of nonprofits. In fact, Massachusetts statutes specifically give members of nonprofits the right to sue to enforce their rights. e.g our lawsuit against UNAA leaders is allowed by state law that provides that 10% of the members eligible to vote at the AGM can get court authority to call a Special Meeting. In addition, any ONE member has the right to petition court for right to enforce his inspection rights (to inspect records and books of a nonprofit corporation). Lastly, any ONE member can sue leaders of nonprofits to get a declaratory order where the member feels that the leaders have done something wrong (e.g if leaders violate the duty of loyalty to members or the duty of care).
thanks
From: Brian Kwesiga <unaa@memberclicks-mail.net>
To: joseph.musoke@ymail.com
Sent: Friday, April 10, 2015 11:05 AM
Subject: UNAALIST Nonprofit Law Basics: Who Owns a Nonprofit?
Who owns a nonprofit?
No one.
A major misconception about nonprofit organizations concerns ownership of a nonprofit. No one person or group of people can own a nonprofit organization.
Ownership is the major difference between a for-profit business and a nonprofit organization. For-profit businesses can be privately owned and can distribute earnings to employees or shareholders. But nonprofit organizations do not have private owners and they do not issue stock or pay dividends. And while nonprofit organizations can earn a surplus, that income must be reinvested in the nonprofit organization — possibly to benefit or expand programs according to the charitable mission. But that income cannot be distributed to persons.
If there is no owner, who manages and controls a nonprofit?
Once incorporated, the newly created nonprofit organization is a separate legal entity from its incorporators, directors, officers, and employees. The nonprofit corporation owns assets of the business and is entitled to receive the revenue from its operation.
Many nonprofits are managed by boards; others may be managed by voting members. When a nonprofit first begins operating, the board members, along with the founder(s), may perform many of the tasks of the organization. As the nonprofit grows, the board may begin hiring staff members to develop and lead programs as the board and/or voting members continue to oversee the organization.
But none of these individuals or groups have any ownership rights in the organization. And while they don't own the nonprofit, they do have significant legal and ethical duties that cannot be delegated to others. Learn more about directors' duties.
What about the founder? Doesn't the founder of a nonprofit own it?
No. The founder does not own the nonprofit.
Certainly, starting a nonprofit organization takes considerable time, effort, and money. And the founder may feel closer to the mission and the programs than anyone else. But that founder does not have any ownership rights in the nonprofit.
Often times the founder will serve on the initial board of directors, which manages the nonprofit. The board safeguards the public's interest to ensure that the organization operates in accordance with its mission and the purpose for which it was granted tax-exempt status and protects the assets of the nonprofit.
As a member of the board of directors, a founder has the same responsibilities as other board members. While a founder may feel closer to the organization that she helped to form, a founder has no ownership rights regarding the nonprofit corporation.
To whom is the the nonprofit accountable?
The organization is accountable to many constituencies.
- The General Public. Nonprofits are created to provide a charitable purpose to the public good, whether as charities, educational programs, churches or religious groups, or scientific or artistic organizations.
- State Agencies. Nonprofits must also comply with certain regulations in the states in which they operate. These may also require public disclosure of specific documents or the filing of certain reports.
- The IRS. Certain tax-exempt entities follow rules set by the IRS to keep their tax-exempt status.
Can a nonprofit be sold?
No. A nonprofit cannot be sold to another individual or organization. Additionally, the assets acquired by a nonprofit were acquired with the understanding that they will be used to further the mission of that organization. If a nonprofit decides to cease operations, the organization must settle all debts and distribute all of the nonprofit's remaining assets to another nonprofit corporation before it can be dissolved.
Brian M. Kwesiga
President and CEO,
Ugandan North American Association - UNAA
972.415.6372 | www.unaa.org | "United We Stand"
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