Yes, you can have other WP sites within another; I have many set up in this manner.
To clarify, when you are changing the "Reading" parameters and the other items you mention, you are doing these from a successful login to the Admin dashboard after going to http://domainname.com/members/wp-admin?
If so, in Settings > General do you have:
WordPress Address (URL)= http://domainname.com/members
Site Address (URL)= http://domainname.com/members
What is the URL of the landing page when you get the not found error?