New York to Overhaul the Not-for-Profit Corporation Law

The New York State Attorney General has worked alongside leaders in nonprofit communities for years as a means to make changes to the Not-for-Profit Corporation Law. They are aiming to ensure that nonprofits provide fair compensation to their employees, as well as improve their management structures and make all of their transactions accessible to the public. These proposed changes are looking to go into effect on January 1, 2014.

Nonprofit reform has been an issue of heated discussion for many years now, especially when considering the high amount of revenue that nonprofits bring into New York State. These organizations have long needed better protections against fraud within their companies and have also needed to instate stronger whistle-blower protection policies, so individuals who attempt to expose misconduct or illegality within the company can avoid social or career persecution. 

Nonprofit leaders have been strongly in favor of this legislation, as it tries to simplify procedures that have long been considered cumbersome and pedantic. The legislation will also introduce improved technology into the nonprofit sphere, modernizing nonprofits without forcing them to sacrifice funds in other arenas.

Key provisions of the Nonprofit Revitalization Act include:

• All companies in the country have recently had to deal with staff reduction and decreases in budgeting. As a result of this, incidents of fraud and theft have increased within companies. Nonprofits have been hit the hardest with these misfortunes and the bill aims to revitalize these organizations by establishing more succinct internal controls and derailing traditional power structures that have led to corruption.

• This legislation will prevent any individual who serves as Chair of the organization's Board of Directors from also being a company employee. This provision aims to promote independent leadership within nonprofits, rather than isolating a select few individuals to have full reign over the company.

• If any individual who owns 35 percent or more of the company has a vested interest in a certain transaction the company is making, the Board will be legally obligated to consider the advantages of other transactions.

• Mandatory auditing will be instated, by which an auditing committee will need to be established for each company. This will also aid in working through potential conflicts of interest within the company.

• Definitive conflict of interest policies must be instated, including what constitutes a conflict of interest and how such situations will be resolved.

• Mandatory whistle-blower policies will need to be created. Any organization with more than 20 employees and an annual revenue greater than one million dollars will be required to adopt said policies. These procedures will aim to protect the companies against retaliation from whistle-blowers, as well as instill frameworks for reporting suspected misconduct.

• The bill will also attempt to eliminate some of the hurdles that come along with making administrative changes within nonprofits.

• One of the main concerns of nonprofits has been the two-step approval process in place for all nonprofit mergers. The new law would allow the Attorney General to serve as an alternative approval to the Supreme Court, so as to allow these mergers to happen in a time-efficient manner.

• For all real estate transactions, the law will require a Board approval of two-thirds, rather than the previous requirement of majority rule.

• Presently, many nonprofits have been required to obtain the approval of the State Education Department before incorporation. The types of companies that will be required to gain approval will be minimized and approval will only need to be granted within 10 days of incorporation.

• The four types of nonprofits will be eliminated in lieu of two types: charitable and non-charitable. Organizations formed for both charitable and non-charitable purposes will be considered charitable corporations in the eyes of the law.

• Nonprofits will have full access to electronic means of communication, including e-mail and videoconferencing.

• This law will change the requirement to obtain an audit from a gross revenue of 250,000 dollars to 500,000 dollars.

The new law will stress the importance of granting fair, reasonable compensation to all nonprofit employees for the services they are performing. A compensation committee will need to be created as a means to consistently ensure that compensation is adequate. Any employees making greater than 150,000 dollars will be reviewed.

About the Author

Fran Perdomo is a leading NYC Business Lawyer, who focuses on entertainment law and commercial litigation. Learn more by visiting her website at Perdomo Law.

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