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New York Adopts the Nonprofit Revitalization Act

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New York Adopts the Nonprofit Revitalization Act

Nonprofit Revitalization Act Update.

New York's Nonprofit Revitalization Act was passed in December of 2013 and took effect on July 1, 2014. The Act made several changes to the laws governing New York nonprofits in an attempt to shore up board independence, improve accountability and modernize outdated provisions. Below is a discussion of some of the changes. Since the Act's original passage, a number of updates have been made. Please refer to the New York Charities Bureau for more information about updates to the Act.

Changes for Newly Forming Organizations: New nonprofits that have an educational mission will no longer need to seek consent from the Commissioner of Education, unless the new nonprofit is a school, college, university, museum, library or historical society. In addition, the certificate of incorporation of a new nonprofit will still need to state its purpose, but may opt not to list its activities.

Elimination of Type A-D Classifications: The Act does away with New York's Type A-D system of classifying nonprofits - now they will all be either charitable or non-charitable. As for organizations formed prior to the Act, all Type A organizations will be non-charitable, all Type B and C organizations will be charitable, and Type D organizations will be classified in accordance with their mission.

Conflict of Interest Policy: By July 2015, all New York nonprofits must adopt a Conflict of Interest Policy. The Act sets forth guidance for drafting the Policy, which must require directors, officers and key employees to act in the best interest of the nonprofit, and includes a definition of related-party transactions. Directors must make annual disclosures regarding potential conflicts.

Related Party Transactions: The Act provides an approval process that must be undertaken before a nonprofit may enter into a transaction with a related party. The process is very similar to the Internal Revenue Service's safe harbor guidelines in the intermediate sanctions context. The potential conflict must be disclosed, the transaction analyzed in comparison to available alternatives, and the decision made (and documented) that it is in the best interest of the organization. The Act empowers the Attorney General to challenge related party transactions, and to impose penalties where the approval process is not followed.

Whistleblower Policy: Nonprofits with at least 20 employees and $1 million or more in annual revenue must adopt a Whistleblower Policy. The Act sets forth guidance for drafting the Policy.

Prohibition on Paid Board Chair: Under the Act, the Chair of the Board of a New York nonprofit may not also be a paid employee of the organization. This prohibition goes into effect in July 2015.

Executive Compensation Setting: The Act provides a process for approving executive compensation packages. It states that no person who may benefit from a compensation decision may be present at, or otherwise participate in, any board or committee deliberation or vote concerning that person's compensation unless board or committee requests that the person present information or answer questions at the meeting before the vote.

Board Action by Email and Video Conference: The Act officially authorizes what many nonprofits were already doing - having board meetings via videoconference, and taking board action via email consent, as long as the nonprofit's organizing documents expressly permit this.

Approval of Major Corporate Changes: Before the Act, New York nonprofits had to seek approval from both the Attorney General's office and the State Supreme Court in order to effectuate such changes as mergers, consolidations, dissolutions and changes of purpose. The Act streamlines the approval process by eliminating the need for the involvement of the State Supreme Court. If approval is not forthcoming from the Attorney General, nonprofits may then appeal to the Court.

Real Estate Transactions: Before the Act, two-thirds of the entire nonprofit board comprised of fewer than 21 directors had to approve any purchase, sale, lease, exchange or other disposition of real property. The Act lowers this threshold by permitting approval by a simple majority, as long as the property to be acquired or disposed of does not constitute all, or substantially all, of the assets of the nonprofit.

Number of Directors: Under the Act, corporations without members will be able to fix the number of directors on the board by action of the board if a specific provision of the bylaws so permits. It will no longer be necessary to amend the bylaws to change the number of directors.

Financial Oversight and Audits: Beginning on January 1, 2015, nonprofits that have more than $500,000 in annual revenue, and which must register to engage in charitable solicitation in New York, will have to create an audit committee comprised of at least 3 independent directors to actively oversee the nonprofit's accounting and financial reporting. The audit committee will need to review the nonprofit's annual audit. There are additional oversight requirements for groups with more than $1 million in annual income. These requirements apply to nonprofits incorporated in other states that raise funds in New York, as well as to New York nonprofits.

Charitable Solicitation Reporting: The Act increases the monetary thresholds for reporting to the Attorney General as follows:

  • Starting on July 1, 2014, organizations with gross revenues under $250,000 (previously $100,000) may file unaudited financial statements signed by the chief financial officer and president, or other authorized officer, under penalties of perjury. Organizations with gross revenues greater than $250,000 (previously $100,000) but less than $500,000 (previously $250,000) must file annual financial reports accompanied by an independent certified accountant's review report. Organizations with gross revenues greater than $500,000 (previously $250,000) must file annual financial statements accompanied by an independent certified public accountant's audit report with an opinion that the financial statement and balance sheet fairly present the financial operations and position of the organization.
  • In 2017, these threshold levels are raised so that organizations with gross revenues under $250,000 will still file unaudited financial statements, but organizations with gross revenues between $250,000 and $750,000 must file annual financial statements with a CPA's review report, and organizations with gross revenues over $750,000 must file annual financial statements with certified audit reports.
  • In 2021, the threshold is increased to allow organizations with gross revenues between $250,000 and $1,000,000 to file annual financial statements with review reports and organizations with gross revenues over $1,000,000 to file annual financial statements with certified audit reports.

New York based nonprofits should review the new requirements, determine which provisions are relevant and applicable to it, and make changes as needed. At minimum, most organizations will want to adopt Conflict of Interest and Executive Compensation Setting Policies (if they do not already have them in place), and amend their bylaws to allow videoconference meetings and email voting.

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