BIG NEWS for New York Nonprofits

New York’s legislature recently passed the first major revision of its Not-for-Profit Corporation Law since it went into effect in 1970. This is big news because nonprofits are a big part of our economy. According to the New York Attorney General’s office, nonprofit organizations operating in New York generate hundreds of billions of dollars in annual revenue – the highest of any state in the nation – and are responsible for 1 in 7 jobs. By some estimates there are 900 nonprofits in Orange County alone. Nonprofit schools and medical and social services organizations are the regions’ largest employers.

The Nonprofit Revitalization Act focuses primarily on streamlining operations and enhancing accountability and transparency. Assuming the Governor signs the bill into law, it will take effect on July 1, 2014. Following are highlights.

1. No More Activities. When incorporating, it will no longer be necessary to specifically describe planned activities. It will be sufficient to state the corporate purposes. This means shorter incorporation papers and less opportunity for bureaucrats to find reasons to reject applications.
2. No More Regents. Currently, any corporation that “might” be chartered by the New York State Board of Regents must obtain the Regents’ approval for formation, merger, dissolution and charter amendments. This causes delays and expense for all kinds of entities that plan to “educate,” “teach” or have “classes,” however informally. Come next July, only corporations that “must” be chartered by the Regents must obtain such approval. Those corporations are schools, colleges, universities, libraries, historical societies and museums. Other kinds of corporations will only need to notify the Regents, and will no longer need approval.
3. No More Types. New York is the only state in the nation with four “types” of nonprofits, “A” through “D”. The categories caused confusion and often made it difficult to obtain federal tax exemption. Come July, the types will be gone, replaced with just “charitable” and “non-charitable” corporations. “Non-charitable” nonprofits include social clubs, chambers of commerce, business leagues, homeowners associations, labor unions, fraternal societies and many others. Existing corporations will be “grandfathered” and need not file any papers.
4. No More Typos. Currently, if there is a minor typo in the incorporation or amendment papers, the bureaucrat has to mail back the papers so the applicant can make the correction. Like fixing a stray comma or period. Truly. Come next July, the bureaucrat can contact the applicant and get authority by fax or email to make the correction.
5. The “Entire” Board. The phrase “entire” board has always been ambiguous. Now it is clearly defined. [1]
6. Simpler Committees. The distinction between standing and special committees has been eliminated.
7. Less Paper. Come next July, notices of board meetings can be sent by fax, email or other electronic means. Votes that require unanimity can be done electronically. Meetings can be held via Skype or similar video conferencing. Annual financial reports and other mandatory filings can be submitted in electronic form.
8. Less Auditing. Today, nonprofits with gross revenue over $250,000 must submit an auditor’s report and audited financial statements to the Attorney General every year. Next July that threshold increases to $500,000, and will go to $750,000 in 2017 and $1 million in 2021.
9. Audit? What Audit? There is now no requirement as to what a board is to do with its auditor’s financial statements and report. Come next July, the board, or an audit committee of the board, will have to review the audit findings with the auditor. There are additional requirements for charities having over $1 million in annual revenue.
10. Less Court. Court approval is now required for dissolutions, mergers and substantial sales of assets. Come next July, only approval from the Attorney General will be required. Court is still available if there is a dispute or the desire for an extra level of approval.
11. Real Property. Now, a 2/3 vote of the entire board is required to purchase, sell, lease, exchange or mortgage real property. Come next July, a simple majority vote of the board, or a committee authorized by the board, will suffice unless the real property constitutes all or substantially all of the corporate assets. If that is the case, then a 2/3 vote is required except for boards of 21 or more members, in which case a majority of the entire board will be sufficient.
12. Mergers. Education and religious corporations were only permitted to consolidate. Now they can merge. [2]
13. Transactions with Insiders. The new law requires greater disclosure and scrutiny of loans, sales, purchases and other transactions of the corporation with directors, officers, employees, and their relatives and affiliated entities. Transactions must be fair, reasonable and in the best interests of the nonprofit. Alternatives must be considered. It must all be documented. The Attorney General can bring parties to court to unwind unqualified transactions, and can seek double damages for willful misconduct.
14. No More Employee-Chairs. The CEO and other employees will be barred from also serving as Chair of the board. Critics want the law to go further, prohibiting all employees from serving on their board, and also prohibiting compensating directors.
15. No More Voting on Your Own Compensation. People who may be paid by the corporation can no longer participate in the deliberations or votes on such compensation.
16. Conflict of Interest Policy. Every nonprofit must adopt one.
17. Whistleblower Policy. Every nonprofit with 20 or more employees and more than $1 million in annual revenue must adopt one. Most hospitals will be exempt, but they are already required to have such policies to accept Medicaid funds.
18. More Inspections. Directors and officers will have a legally enforceable right to inspect a nonprofit’s books and records if there is suspicion of wrongdoing. Now, only creditors and members have this right.

Apart from improving performance and accountability, these changes are expected to make New York more competitive in attracting and retaining nonprofits. Further information and guidance is available at the Attorney General’s website, NYCON, and professionals experienced in representing nonprofit organizations.

[1] “Entire Board” means the total number of directors entitled to vote which the corporation would have if there were no vacancies. If the by-laws provide that the board shall consist of a fixed number of directors, then the “entire board” shall consist of that number of directors. If the by-laws provide that the board may consist of a range between a minimum and maximum number of directors, then the “entire board” shall consist of the number of directors within such range that were elected as of the most recently held election of directors.
[2] In a consolidation, two or more “constituent” corporations form a new corporation and all the constituents cease to exist. In a merger, one or more corporations are absorbed by another pre-existing corporation, the “merged” corporations cease to exist and the “surviving” corporation continues.

Gary Schuster is Senior Counsel on the Business & Estates Team. He can be reached by phone at 845-778-2121 toll free or 845-778-2121 and by email.