As a prudent lawyer once said, the law is much like a promise – fluid. While litigators find and emphasize fluidity among ambiguities in the law, corporate planners prefer clarity, only experiencing fluidity when legislators act and the black letter of the law is changed. Such change is inevitably on the horizon for not-for-profit corporations (“nonprofits”) in New York State after Governor Cuomo signed the Nonprofit Revitalization Act (the “Act”) on December 18, 2013. The Act is responsible for numerous changes to the Nonprofit Law (the “N-PCL”), most of which take effect in July of 2014. In addition, it is worth noting that the Act received significant bipartisan support in an effort to enhance nonprofit governance and oversight aimed at preventing abuses by nonprofits.
Obviously, new nonprofits must become familiar and comply with the new laws when incorporating, drafting organizational documents, and setting policies and procedures. With the passage of the Act, nonprofits will no longer have to select which “type” of corporation they qualify as. Rather, nonprofits are either charitable or non-charitable organizations. Other changes include the types of nonprofits that need pre-approval, and the acceptance of electronically filed registrations by the Attorney General.
While new nonprofits must follow the Act from the point of formation, the looming issue is how existing nonprofits in New York State must react. The following highlights the general types of changes that existing nonprofits are required to make in light of the Act and should serve as an impetus for existing nonprofits to develop a detailed understanding of the Act and what they will need to do in order to comply with it.
Simply put, the burden on existing nonprofits is not all that, well, burdensome. Among the one hundred and thirty-two sections of the Act, the bulk of the changes altered the layout of the N-PCL. For instance, forty-five sections in the N-PCL were changed to give effect to the removal of the “types” of nonprofits, but do not require existing nonprofits to take any action to remove their current status as a Type A, B, C or D nonprofit. Nonetheless, there are several changes that existing nonprofits should take note of and respond accordingly to.
Two changes to the N-PCL draw significant attention, because they may require a nonprofit to change its corporate documents. First, all nonprofits must adopt a written conflict-of-interest policy. At a minimum, such a policy must define the circumstances that constitute a conflict of interest, must provide the procedures for disclosing a conflict, must require a deliberation on the matter without such person present, must prohibit any improper influence during the deliberation, must require documentation of the conflict and its resolution, and must provide procedures for disclosing, addressing, and documenting related party transactions. In the past, conflict-of-interest policies were not required. In fact, corporations filing for 501(c)(3) status could even state on their IRS application that no such policy was adopted.
The second change potentially impacting the corporate documents is that nonprofits with twenty or more employees and annual revenues exceeding $1 million must adopt whistleblower policies. At a minimum, such a policy must provide procedures for reporting violations or suspected violations, must require an employee, officer or director to be designated to administer the policy and to report to either a committee or the board, and must require distribution of the policy to all officers, directors, employees and volunteers.
Accordingly, the impact of the Act on any given nonprofit is that the corporate documents must be evaluated and perhaps updated to reflect new policies.
Furthermore, there are numerous changes that could affect a nonprofit’s practices. While all of the changes do not necessarily require paperwork or filing fees, they should breed discussion and perhaps adoption of new policies and procedures.
Most importantly, the reporting requirements are going to be raised in July 2014. Until June 30, 2017, the groupings are as follows: (a) nonprofits with less than $250,000 of gross revenue must prepare and file an annual unaudited financial report on forms prescribed by the Attorney General; (b) nonprofits with $250,000 – $500,000 of gross revenue must prepare and file an annual GAAP-compliant financial report accompanied by an annual financial statement that includes an independent CPA’s review report; and (c) nonprofits with more than $500,000 of gross revenue must prepare and file an annual GAAP-compliant financial report on forms prescribed by the Attorney General accompanied by an annual financial statement that includes an independent CPA’s review report containing a signed opinion that the financial statements are presented fairly in all material aspects and in conformity with GAAP. While the new reporting requirements do not necessitate a paper change, they certainly impact the practice of any nonprofits that fall under a new category with the new groupings.
There are several other changes to the law that will impact the actual practices of nonprofits. First, the Board or Board committees must undertake an independent review of transactions between the nonprofit and related parties. Second, individuals may not partake in deliberations or any voting impacting their own compensation. Third, in the case that a nonprofit falls into the reporting category requiring an independent CPA audit, the Board or Board committees must provide certain oversights. Fourth, effective as of January 1, 2015, an employee may not serve as Chair of the Board. The response to these changes could be as simple as following the rules – i.e., having the Board undertake independent reviews and oversights, forbidding individuals from partaking in decisions on their compensation, and forbidding employees from serving as Chair of the Board. However, it may also be wise to create formal policies or new committees to help ensure compliance with these new requirements.
Finally, some of the changes are simply informational. For instance, come July 2014, officers, directors, key employees, and agents will be subject to the personal jurisdiction of New York Courts and may be served process. Also, nonprofits may use facsimile and electronic transmission for certain notices to their members and for certain filings.
Tyler Ellis is an Associate at Boylan Code LLP, concentrating his practice on general corporate matters. For more information, please contact Tyler at (585) 232-5300 or tellis@boylancode.com.
