PANDEMIC CHALLENGES FOR NONPROFITS
Observers are predicting a challenging road ahead for many charitable nonprofits, especially those that rely on funding from state and local governments. Tax revenues are down and deficits are ballooning. It is widely expected that sooner or later, government funding of charitable nonprofits will be reduced or even eliminated. Private philanthropies and donors will work to fill the gap but will have to allocate their limited resources among many needy and worthy organizations. With funding scarce, many charities may be compelled to merge with others, or even close their doors for good. In this stressful environment, directors of nonprofits need to keep in mind their legal and fiduciary duties.
Both the New York State Attorney General and the Internal Revenue Service have enforcement power, and under the right circumstances could impose personal liability on nonprofit directors.
NONPROFIT DIRECTOR DUTIES
It is said that nonprofit directors have three primary duties: care, loyalty and obedience.
Care means the director pays attention to the nonprofit, stays current on operations and challenges, and actively participates in governance.
Loyalty means the director puts the interests of the organization above his or her own personal interests.
Obedience means the director sees to it that the director, and the organization, obeys the law, as well as the Certificate of Incorporation, bylaws, corporate policies, and board resolutions.
When the going gets tough, some directors may be tempted to walk away and abandon the nonprofit. That would be a violation of the duties of care and obedience. To help deter such action, nonprofits can revisit their bylaws. Many bylaws allow directors to resign without the need for board acceptance or approval. That can be changed so that resignations will require board approval. This could prevent a race to the exits, leaving just a loyal few to deal with the most difficult decisions. The law requires a minimum of three directors.
As for the last three walking away from a nonprofit, that is simply not lawful. The legally required procedure is an orderly corporate dissolution that complies with the requirements of the Not-for-Profit Corporation Law. The Charities Bureau, a division of the Attorney General’s office, provides publications on its website laying out the steps required and providing sample documents. Dissolution is subject to the approval of the Attorney General’s office, which is largely concerned with the disposition of corporate assets, especially those subject to restrictions.
Directors should not allow a nonprofit to go broke. Dissolving in compliance with the law costs money. Bills must be paid, and often, accountants and attorneys must assist. If a nonprofit is down to its last few thousand dollars, with no hope of improvement, it is already past time to dissolve (or merge).
Nonprofits with assets must dispose of them in compliance with law. That means, first, satisfying all corporate obligations. Any remaining assets must typically be transferred to another charity having the same or similar chartable purposes. The Attorney General will want to know about the intended recipients of the assets, and will want assurances that any restrictions will be honored. Failing to satisfy corporate debts, or misapplying remaining assets, could expose nonprofit directors to personal liability.
Merger may be a viable alternative to dissolution. Like dissolution, merger is subject to the approval of the Attorney General. Again, the Charities Bureau provides a publication laying out the required steps.
Merger is typically more complex than dissolution since it involves the combining of two organizations with their own missions, services, culture, employees, debts, policies, etc. There have been many successful mergers of nonprofits, and also many not so successful. In exploring a merger, as in a business merger, non-disclosure and confidentiality agreements can be used to protect important interests. Be mindful that government agencies other than the Attorney General may need to give approval, such as the Board of Regents, Office of Children and Family Services, Superintendent of Financial Services, or Commissioner of Health.
Another possible solution to financial stress is affiliation – working with other nonprofits on jointly purchasing supplies, services, space, and even staff. This is not a fundamental corporate change like dissolution or merger, but can simply be a contractual arrangement.
It may also be possible for a nonprofit to simply sit tight for a while. If a nonprofit has no employees and does not have to pay rent or utilities, it may be able to reduce its expenditures to virtually zero. Perhaps it can hang on for a few months and reactivate when the economy begins to recover. As long as the nonprofit timely files its federal and state tax returns, it can maintain its corporate existence. With little or no revenue or expenses, the tax return should be quite minimal. This option must be viewed as a temporary suspension because of the crisis, not a permanent situation. Suspension is not a solution for everyone, but it might work for some.
Whether considering dissolution, merger, affiliation, or suspension, planning and execution will take time. If any of these might be a possibility, it is best to start thinking about it as soon as possible.
This is not intended to be legal advice. You should contact an attorney for advice regarding your specific situation.
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Gary M. Schuster is partner at the firm and practices business, non-profit, and arts and entertainment law. He can be reached at 866-303-9595 toll free or 845-764-9656 and by email.