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Nonprofit Best Practices Now Mandatory

Jun 26, 2014

The Nonprofit Revitalization Act of 2013 implements significant changes to New York State's nonprofit laws, effective July 1, 2014. The changes mandate best practices in governance and accountability of all New York nonprofit organizations but also simplify regulatory burdens. As a result, some organizations may need to make significant modifications to their bylaws, conflict of interest, and oversight policies.

Nonprofit board members must review the Act to determine what changes may be required to ensure compliance by their organization. Key issues for review include the following topics, among others as may apply to particular organizations.

  • Electronic Notices and Voting.  A welcome procedural change for all nonprofits is the Act's adoption of e-mail and fax for delivery of board and membership meeting notices, waivers, and unanimous consents. The Act also prescribes specific measures to secure proof of delivery of such electronic notices and proper recordation of electronic written responses. In addition, board members will be able to participate in meetings and cast votes by video conference, Skype or other forms of video communication.

What To Do: Review your certificate of incorporation and bylaws. If electronic means have not been recognized in the formation documents, the nonprofit may be needlessly restricting its procedures and actions. The board may also wish to allow votes by electronic delivery of unanimous consent of the directors and/or members.

  • Delegation of Authority.  The Act now differentiates between "committees of the board", which consist exclusively of board members, and "committees of the corporation", which may include non-board members. There is no longer any designation as a "standing" committee or a "special" committee. Notably, committees of the board may be delegated with the authority to enact decisions that bind the board, whereas committees of the corporation may not.

What To Do: Review your bylaws to evaluate what committees were created and how they are utilized in any decision-making process. While nonprofits benefit greatly from member involvement on committees, such committees may not commit the board to a particular decision. Procedures may need to be revised to bring committee recommendations before the board for a vote, or consider creating a committee of the board within a committee of the corporation to enable the committee to take binding action. 

  • Compensation of Officers and Directors.  Directors, officers, and members of a nonprofit may be reasonably compensated for their services rendered to the nonprofit. The Act now prohibits any person whose compensation is being decided upon from being present at or participating in any deliberation or vote on their own compensation. However, the board may question the individual for background information prior to the start of deliberations.  In addition, as of July 1, 2015 (rather than 2014), any employee of the corporation may not serve as chair of the board or in any officer position with similar responsibilities. Therefore, the chair, or any officer that presides at board meetings in the absence of a chair, may not receive any compensation from the corporation.

What To Do: Review compensation paid by the nonprofit to confirm (1) it is reasonable, and (2) it was adopted by a vote according to the Act. If compensation is paid, the board must delegate typical duties of the chair of the board to an unpaid director or officer position.

  • Related Party Transactions.  Any agreements or transactions with a "related party" (directors, officers, key employees, shareholders with a 35% or greater ownership interest in the corporation and their relatives) are subject to particularly close scrutiny. A nonprofit may only engage in a transaction with a related party once the board has (1) considered alternative transactions to the extent available, (2) approved the transaction by a majority vote of directors, and (3) documented the basis for board approval, including discussions of alternative proposals and transactions.

What To Do: Related party transactions include, for example, agreements for services or for the purchase of products. The board must review all such agreements, including those already in place or underway, to confirm that all board deliberations regarding a related party transaction are properly evaluated and documented, and exclude the interested director, officer, or key employee from the deliberations and vote.

  • Conflict of Interest Policy.  All nonprofits, no matter the size, purpose, or revenue generated, must have a conflict of interest policy that: (1) defines the circumstances constituting a conflict of interest; (2) provides procedures for disclosing a conflict of interest; (3) prohibits any person with a conflict of interest from being present at or participating in deliberations or votes on the matter giving rise to such conflict; (4) requires that the existence and resolution of the conflict be documented in the nonprofit’s records; and (5) provides procedures for disclosing, addressing, and documenting related-party transactions. In addition, prior to the election of any director, and annually thereafter, each director must submit a written, signed disclosure of potential conflicts.

What To Do: Determine if a sufficient conflict of interest policy has been adopted. If the organization adopted a conflict of interest policy via the IRS nonprofit 501(c) application process, this would likely satisfy the requirements of the Act. In addition, an annual statement must be collected from each director disclosing potential conflicts.

  • Financial Audit and Oversight.  Charitable nonprofits that must register to solicit charitable contributions in New York are required to file an annual audit with the New York State Attorney General. An organization with annual gross revenue greater than $500,000 (increasing on July 1, 2017, to $750,000 and again on July 1, 2021 to $1 million) must also file audit report prepared by a CPA. Such organizations must also form an audit committee composed of "independent directors" to oversee the accounting and financial reporting processes and retain an independent auditor on an annual basis.  Nonprofits with special purposes, such as fire companies, may have additional audit requirements unrelated to the Act. Fire companies with revenues of $300,000 or more that contract to provide fire service to a city, town, village, or fire district must obtain an annual audit of their records by an independent certified public accountant. A certified copy of the audit must be provided to the fire company and the contracting municipality within 180 days of the end of the fiscal year.

What To Do: Only nonprofits that solicit charitable donations are subject to the audit committee and reporting requirements under the Act, and the type of reporting required will depend upon the nonprofit's annual gross revenues. Nonprofits should review their revenue and consider establishing an audit committee comprised of independent directors to ensure compliance with annual financial reporting requirements on a yearly basis.

The Nonprofit Revitalization Act streamlines and modernizes the regulatory requirements applicable to nonprofits but it also holds the organization accountable for practices that were not previously scrutinized. All nonprofits, regardless of size, will need to confirm compliance with voting procedures, related party transactions, and conflict of interest policies. Larger nonprofits will have additional requirements to bring their operations in compliance with the best practices standards set forth by the Act.

The scope of the Act and its varying effect on nonprofit organizations may make it difficult to determine how its requirements impact your nonprofit. For assistance with compliance or other issues affecting nonprofit organizations, please contact Amy Varel or Raquel Laude.

This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.