New York Amends Nonprofit Requirements

New York Amends Nonprofit Requirements
The January 2014 Riker Danzig Tax and Trusts & Estates Update

On December 18, 2013, Governor Andrew Cuomo signed into law the Non-Profit Revitalization Act of 2013.  The Act generally applies to not-for-profit corporations incorporated in New York and charitable trusts governed by New York law, but also applies in some respects to other nonprofit organizations that raise money or otherwise operate in New York State.  The Act simplifies a number of procedural requirements that previously applied to nonprofit organizations in New York, but also tacks on a number of new requirements, and expands the powers of the New York State Attorney General to enforce those and other requirements.  Even for nonprofit organizations that are not subject to the Act’s provisions, many of the Act’s new requirements can be viewed as best practices, and may eventually become requirements under New Jersey or Delaware law.

The following is a summary of the Act’s pertinent provisions, which generally take effect on July 1, 2014:

Annual Financial Statements and Audits: Thresholds Are Raised, and Independent Directors Control the Process.  Currently, organizations registered with the New York Charities Bureau that either have annual gross revenue in excess of $250,000, or pay anyone any amount to help them raise funds, are required to submit audited financial statements each year.  Organizations with annual gross revenue between $100,000 and $250,000 and that do not pay anyone to help them raise funds are required to submit financial statements accompanied by an independent CPA’s review report, but not a full audit.  Other organizations may submit unaudited, self-prepared financial statements.  Under the Act, the $250,000 threshold is raised to $500,000 (and $750,000 starting in 2017, and $1 million starting in 2021), the $100,000 threshold is raised to $250,000, and paying so meone to help with fundraising is no longer relevant to these annual requirements.  The Attorney General may also permit these annual submissions to be done electronically.

In addition, the Act requires that the independent directors or trustees (i.e., individuals that are not, and are not related to anyone that is, compensated by the organization), or an audit committee that consists entirely of independent directors or trustees, be responsible for hiring and overseeing the work of the auditor if audited financial statements are required.  If the board of directors or all of the trustees are not themselves responsible for maintaining compliance with the conflicts and whistleblower policies described below, then the audit committee or another committee consisting entirely of independent directors or trustees must be responsible for these policies as well.

Conflicts of Interest: Best Practices Required.  The Act prohibits New York not-for-profit corporations and charitable trusts from entering into related party transactions (including certain compensation arrangements) unless the directors or trustees determine them to be fair, reasonable and in the organization’s best interest.  Directors, trustees, officers and key employees must disclose their interests in potential transactions, and the directors or trustees must consider alternatives and document their basis for approving a related party transaction (as opposed to any considered alternative).  These requirements are frequently contained in conflicts policies that nonprofit organizations adopt in connection with their applications for tax-exempt status.  The Act now mandates that New York not-for-profit corporations and charitable trusts adopt suc h policies.

The Act generally prohibits directors, trustees and officers from voting on, or participating in deliberations with respect to, their own compensation, and, starting in 2015, prohibits an employee from serving as chair of the board of a New York not-for-profit corporation.

The Act permits the Attorney General to sue a New York not-for-profit corporation or charitable trust to enjoin, void or rescind an actual or proposed related-party transaction that is illegal, unreasonable or not in the best interests of the organization.  Directors, officers and key employees of New York not-for-profit corporations are explicitly made subject to the jurisdiction of the New York courts in suits by the Attorney General.

Whistleblower Policy Required.  Because IRS Form 990 asks whether public charities have in place a whistleblower policy, many nonprofit organizations already have such policies.  The Act now mandates these policies for New York not-for-profit corporations and charitable trusts with 20 or more employees and annual revenue in excess of $1 million.

Electronic Communications Permitted.  The Act explicitly permits that notice of meetings, waivers of notice, proxy designations and consents to actions taken without a meeting be given by fax or email.  Email voting by a board or committee, however, is generally only effective if the vote is unanimous.  Otherwise, a meeting is required.  As long as a person can hear and be heard by others at a meeting in real time – such as if a speaker phone, Skype or other video conferencing technology is used – that person is considered present at the meeting.

Real Estate Transactions Streamlined.  Currently, real estate purchases, sales, mortgages and leases must be approved by two-thirds of a New York not-for-profit corporation’s board.  Under the Act, approval of just a majority of the board – or a designated committee of the board – is now sufficient for this purpose, as long as the real estate does not constitute substantially all of the assets of the corporation.

Committee Powers Clarified.  The Act clarifies that New York not-for-profit corporations may have two types of committees: “committees of the board” and “committees of the corporation.”  Each committee of the board must be made up of at least three directors and no individuals other than directors, but the board may delegate some or even most of its authority to a committee of the board.  Committees of the corporation may include directors and non-directors, but they cannot act on behalf of the board; their scope is limited to performing certain tasks (in the same way that officers do) and making recommendations to the board or to committees of the board.

Privacy for Directors and Officers.  Under the Act, the State may no longer mandate that a New York not-for-profit corporation disclose the home addresses of its directors and officers.

Type Designations Eliminated.  Currently, all New York not-for-profit corporations must be classified as Type A, B, C or D.  A designation other than as Type B can make obtaining IRS recognition of 501(c)(3) status difficult.  Under the Act, the four type designations are done away with, and all New York not-for-profit corporations will either be designated as “charitable corporations” (which may be eligible for 501(c)(3) status) or “non-charitable corporations.”

Judicial Approval of Changes Eliminated.  Under current law,  sales of substantially all of the assets of many New York not-for-profit corporations, amendments to a New York not-for-profit corporation’s purposes, mergers or consolidations involving New York not-for-profit corporations, and dissolutions of many New York not-for-profit corporations require the approval of both the Attorney General and a Supreme Court justice.  Under the Act, only Attorney General approval is generally required.

Education Department Consent Requirement Limited.  Currently, New York State Education Department consent is required to incorporate or do business (or amend its purposes) in New York if any of the not-for-profit corporation’s purposes has anything to do with education.  Getting this consent can add at least two to three weeks to the incorporation or registration process.  Under the Act, consent is only required for schools, colleges, universities and other post-secondary education providers, museums and historical societies; other educational not-for-profit corporations need only provide a copy of their certificate of incorporation or application for authority (or an amendment to these documents) to the Education Department after it has been filed with the Secretary of State.