United States: Is Your Organization In Compliance?: Changes To New York’s Nonprofit Law

Last Updated: October 20 2014
Article by Jacqueline Motyl

The New York legislature has overhauled the law applicable to nonprofit organizations incorporated in the State with the adoption of the Non-profit Revitalization Act (the "Act").

The Act, among other things, changes the characterization of nonprofit entities incorporated in the State; requires nonprofits to maintain a conflict of interest policy and, if necessary, a whistleblower policy; mandates new financial reporting requirements based on gross receipts; and provides a streamlined process for effectuating fundamental transactions.

I.  New Characterizations for Nonprofit Organizations

Prior to the Act, there were four types of nonprofit organizations in New York (A, B, C, and D).  Now, there are only two types – Charitable and Non-charitable.  Existing Type B and C, as well as Type D organizations geared toward charitable activities, will be considered Charitable organizations.  Type A and non-charitable Type D organizations will be deemed Non-charitable organizations.

II.  Conflict of Interest Policy Required for All

The Act requires all nonprofit organizations incorporated within the State to implement and maintain a conflict of interest policy.  Such policy must set forth procedures for disclosure and deliberation on a potential conflict, as well as procedures for voting on whether a conflict exists.  Organizations must keep detailed records of any potential or actual conflict of interest.  Directors must, prior to their election, and annually thereafter, disclose any potential conflict of interest.

III.  Whistleblower Policy Required for Some Nonprofit Organizations

The Act also requires nonprofit organizations with over 20 employees and more than $1,000,000 in gross receipts to implement and maintain a whistleblower policy.  The policy must designate a single individual to administer the policy and receive any complaints filed.  Further, the policy must protect employees against retaliation and ensure the confidentiality of any complaints that are filed pursuant to the policy.

IV.  Financial Reporting Requirements

The Act sets forth financial reporting requirements based on a nonprofit organization's gross receipts:

  • Level 1:  Organizations with gross receipts of $250,000 or less are required to file an unaudited financial report with the state.
  • Level 2:  Organizations with gross receipts of more than $250,000 but less than $500,000 must file an annual financial report reviewed by an independent certified public accountant.
  • Level 3:  Organizations with gross receipts of more than $500,000 must file an audited annual financial report.

The gross receipts figures discussed above are effective through July 1, 2017, at which point, the Level 3 audited annual financial reports will only be required for organizations with gross receipts of more than $750,000.  On July 1, 2021, the gross receipts figure for Level 3 rises to $1,000,000.

V.  Streamlined Fundamental Transactions

Under the Act, fundamental transactions, such as a merger or dissolution, only need to be approved by the Attorney General, meaning the Act removes the prior requirement that nonprofit organizations also seek approval for such fundamental transactions from the court.

The Act also allows nonprofit organizations to approve the sale or purchase of real estate by majority vote of the board of directors.   The sale of real estate that constitutes all or substantially all of the nonprofit organization's assets, however, must still be approved by two-thirds of the nonprofit organization's board of directors unless the nonprofit organization has more than 20 directors, at which point, only a majority vote is needed to effectuate the transaction.

VI.  Other Changes

Some other changes set forth by the Act include:

  • The ability to use electronic communications for delivering notice of a board or member meeting and for holding such meetings;
  • The requirement that the chair of the board of directors or any officer who performs the acts of the chair may not be an employee of the nonprofit organization;
  • The requirement that no director or officer may participate in the deliberation of the vote or the vote on his or her own compensation; and
  • The requirement that the organization have an audit committee composed solely of "Independent Directors," as that term is defined by the Act, which is responsible for the financial reporting requirements discussed above and the adoption and implementation of the organization's conflict of interest policy and whistleblower policy, as applicable.

In sum, the Act changes many aspects of the State's Not-for-Profit Corporation Law, and nonprofit organizations incorporated in New York should ensure their current corporate governance policies comply with these changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jacqueline Motyl
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