Not-for-profit organizations come in all shapes and sizes. From large universities and medical centers to tiny arts organizations and sports leagues, they are all subject to the same laws and regulations.
At the federal level, the Internal Revenue Code provides exemption from income tax to a wide range of organizations. Most people are familiar with 501(c)(3) organizations, which are those organized for charitable purposes. There are actually 29 kinds of 501(c) organizations including social welfare organizations, business leagues, social clubs, cemetery corporations, mutual insurance companies or associations, black lung benefit trusts, and cooperative health insurance issuers.
In New York State, the Not-for-Profit Corporation Law governs the formation and operation of not-for-profit organizations. The Attorney General has the authority to oversee the operations of not-for-profits in New York and to enforce the laws that govern them. In extreme situations, the Attorney General can unwind fraudulent transactions, remove and replace members of a board of directors, and even compel board members or employees to reimburse an organization for losses suffered due to negligence or wrongdoing.
The Charities Bureau, within the office of the Attorney General, provides a great deal of information to the public about forming and operating not-for-profit organizations. One of its publications, called “Right From the Start,” describes the role and responsibilities of directors. You can access that publication here.
As described in the publication, there are three primary duties of directors: care, loyalty, and obedience.
- The duty of care requires that a director give the necessary attention to the activities of the organization.
- This means that the director must be familiar with the bylaws, the budget, financial statements, committees, employees, activities and programs, the corporate purposes as set forth in the certificate of incorporation, and everything else pertaining to the organization.
- The director must attend meetings and serve on committees as required.
- If a financial statement has not been circulated for several months, the director should ask that it be done.
- If a transaction is proposed, the director must give it proper scrutiny.
The duty of loyalty requires that the director set aside his or her own personal interests and put the interests of the organization first. This means that the director should not try to take corporate opportunities for his or her own benefit. The director must be sensitive to conflicts of interest pertaining to himself and to others in the organization. Since 2014, a conflict of interest policy is mandatory for every nonprofit in New York State. Properly exercising their duty of care, directors should ensure that their nonprofits have one and abide by it.
The duty of obedience requires that the director comply with the Not-For-Profit Corporation Law, the certificate of incorporation, the bylaws, board of directors resolutions, and any policies, rules or regulations adopted by the organization. The director must see that the organization complies as well.
Further information about the duties of directors, as well as the many issues involved in running a nonprofit, is available at the Charities Bureau, organizations such as the New York Council of Nonprofits (NYCON), and from attorneys experienced in representing nonprofits.
The relevant law in New York is called the Not-For-Profit Corporation Law. For that reason, we in New York frequently refer to not-for-profit corporations. The phrase “nonprofit corporations” is also commonly used. There is no real difference between nonprofit and not-for-profit. Sometimes it is said that nonprofit describes an activity whereas not-for-profit describes an organization. For the most part the phrases are used interchangeably without any difficulty.