United States: Around The Block With The N-PRA

Last Updated: July 18 2018
Article by Shveta Kakar and Daniel L. Kurtz

§ 1 Introduction to the N-PRA

The Non-Profit Revitalization Act of 2013 ("N-PRA" or the "Act"), which has been characterized as the most sweeping legislation to affect nonprofit organizations in New York in over 40 years, was signed into law on December 18, 2013.1 Most of the provisions became effective on July 1, 2014.2 The N-PRA amends certain provisions of the New York Not-for Profit Law ("N-PCL") and the Estates, Trusts and Powers Law ("EPTL"), and applies to New York nonprofit corporations, and, in certain cases, to New York charitable trusts, New York education corporations, and New York religious corporations. Among the provi- sions and other amendments introduced by the N-PRA are:

  • Provisions eliminating or otherwise reducing unnecessary and outdated burdens, such as the elimination of the four different types of nonprofit corporation (i.e., A, B, C, and D).
  • Elimination of the requirement that certain nonprofit corpora- tions obtain the advance approval of the State Education Department prior to incorporation.
  • Provisions enhancing governance and oversight, and provisions reducing unnecessary and outdated burdens.
  • Provisions easing voting requirements for real estate transactions.
  • Provisions simplifying procedures for certain transactions, such as changing the purposes or powers set forth in the certificate of incorporation; asset sales;merger; consolidations; and dissolutions.
  • Introduction of new corporate governance standards, including the required adoption of a conflict of interest policy and adoption of a whistleblower policy.
  • Guidelines regarding related party transactions.
  • Provisions enhancing theAttorneyGeneral's enforcement authority.
  • Provisions mandating board oversight of the auditing process.
  • Provisions increasing regulation and oversight of employees, officers, and directors.

§ 2 Examination of the N-PRA Provisions

[1] Provisions Eliminating or Reducing Unnecessary and Outdated Burdens

Traditionally the purposes for which nonprofits could be formed were categorized functionally or economically.3 The functional ap- proach enumerates the purposes for which nonprofit corporations can be formed or activities in which they can engage.4 A problem with the functional approach is that the functional categories are necessarily incomplete and ambiguous. A second approach, the economic ap- proach, permits the nonprofit corporation to be formed for any lawful purpose other than bestowing profit or pecuniary benefit on members, officers, or directors unless a more limited purpose is set forth in the certificate of incorporation.5 The economic approach encompasses the non-distribution constraint, and the prime issue is how to identify profit. A third classification system, adopted by California, divides nonprofits on the basis of organizational purpose: public benefit corporations (traditional charities), mutual benefit corporations (private associations or social clubs), and religious corporations (a catch-all category to avoid First Amendment problems).6 New York adopted a hybrid economic and functional approach: "Not-for-profit" accents the nonprofit-seeking character of New York nonprofits though such an organization can be formed for a business, but not a profit-seeking, purpose. 7

Until the effective date of the majority of the provisions of the N-PRA on July 1, 2014, there were four different "types"8 of corporations 9 formed under the N-PCL, each "type" designated by the letters A,10 B,11 C,12 and D.13 All of those types of corporations were subject to different degrees of state regulation. As of July 1, 2014, each corporation formed under the N-PCL is now designated as either a charitable corporation or a non-charitable corporation.14

Footnotes

1 L. 2013, ch. 549 (Dec. 18, 2013).

2 L. 2013, ch. 549, § 132 (Dec. 18, 2013).

3 Note, New York's Not-for-Profit Corporation Law, 47 N.Y.U. L. Rev. 761, 767–768 (1972).

4 Purposes typically included charitable, social, government, religious, and scientific. Note, Permissible Purposes for Nonprofit Corporations, 51 Colum. L. Rev. 889, 890–92 (1951).

5 Model Nonprofit Corporation Act (3rd ed. 2008) § 3.01(a); Note, New York's Not-for-Profit Corporation Law, 47 N.Y.U. L. Rev. 761, 768; 6 White, New York Business Entities ¶ N201.02 (14th ed. 2017).

6 The California approach was adopted by the Model Nonprofit Corporation Act (2d ed. 1987), but was not retained by the Model Nonprofit Corporation Act (3d ed. 2008).

7 Note, New York's Not-for-Profit Corporation Law, 47 N.Y.U. L. Rev. 761, 774; Revisers' Notes, § 204.

8 Until July 1, 2014, N-PCL § 201 provided for classification of not-for-profit corporations into four types (A, B, C, and D), all of which were subject to different degrees of state regulation.

9 A "corporation" or "domestic corporation" as defined in N-PCL § 102(a)(5) must meet two tests: (1) it must be formed under the N-PCL, or exists on its effective date and was formed under any other general statute or by any special act of New York State, exclusively for a purpose or purposes, not for pecuniary profit or financial gain, for which a corporation may be formed under the N-PCL, and (2) no part of its assets, income, or profit of which is distributable to, or enures to the benefit of, its members, directors, or officers except to the extent permitted under N-PCL.

10 Type A corporations were intended to encompass the usual membership-type organization, such as a social club, where the support of the organization was derived from a limited class called "members" and where the non-pecuniary benefits flow primarily to this limited class. They could be formed for any lawful non-business purpose.

11 Type B corporations were traditional charities as developed by common law and the most strictly regulated. They were a class limited to one or more of a specified list of non-business purposes: charitable, educational, religious, scientific, literary, cul- tural, or for the prevention of cruelty to children or animals. The benefited group is the public or some broad segment of it. Therefore, an organization that benefited to a limited number of people would not be granted Type B status. For example, in the case of In re Howard Beach Appeal Fund, Inc., 141 Misc. 2d 735, 534 N.Y.S.2d 341 (Sup. Ct. 1988), the purpose of a proposed Type B not-for-profit corporation was to pay for the legal expenses of three individuals who were convicted of crimes. The Supreme Court of the State of New York denied approval because the proposed corporation was intended for the specific benefit of the three named persons. Additionally, there was no provision for using any portion of funds for benefit of the public or any class of the public, so the purposes could not be characterized as charitable. The Type B classification was justifiably criticized as vague, as are the principles of I.R.C. § 501(c)(3) on which purportedly it was based. See Henry Hansmann, Reforming Nonprofit Corporation Law, 129 U. Pa. L. Rev. 497, 531 (1980).

12 Type C corporations could be formed for any lawful business purpose to achieve a lawful public or quasi-public objective. The Type C category was created to fill the gap that existed in the former New York corporate statutes by permitting a not-for-profit corporation to be formed to conduct a lawful business purpose. The corporation had to meet the requirements of the definition of "not-for-profit corpora- tion" in N-PCL §§ 102(a)(5) and (10), which required that the purposes be non-pecuniary and that there be no flow-through to individuals except as permitted in the statute. This meant that even though the corporation was formed for a purpose normally carried on by businesses, its objective was other than making money. Type C corporations were used for community development and anti-poverty corporations. The Type C category was criticized for its ambiguity. For example, what would happen to organizations formed for a business purpose that did not meet the requirement of having a "public or quasi-public objective?" And what did "business purpose" mean? Did it refer to activities conducted normally by for-profit firms, the motivation of the nonprofit, or the relationship of the organization's customers or purchasers of the entrepreneurial activity? The statute did not render assistance in answering these questions. Some organizations that considered themselves Type B were reclassified by the Department of State as Type C and vice versa.

13 Type D corporations were connectors to other statutes that governed nonprofits. A Type D corporation was a not-for-profit corporation that could be formed under the N-PCL if and when authorized by any other corporate law of the state for any purposes specified by such law and subject to the provisions of the other law. This permitted the use of the N-PCL as the basic law for such matters as internal governance, financial powers, or dissolution for the special provisions particular to a certain type of not-for-profit corporation and eliminated the necessity of including in the special law all the general provisions found in a full-blown corporate statute. Type D corporations were regulated as strictly as Type B corporations, unless otherwise provided in the laws authorizing their formation. Type D corporations were sometimes authorized by other statutes for any business or nonbusiness, or pecuniary or nonpecuniary, purposes specified by the other law, whether or not such purposes were also within Types A, B, and C. Typical Type D corporations were certain religious or private housing finance corporations. See N.Y. Priv. Hous. Fin. Law § 573, amended L. 2013, ch. 549, § 121(2014).

14 N-PCL § 201(a).

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