By Cliff Ennico
Last year, the New York State legislature adopted a law which completely rewrote the rules for nonprofit corporations in that state. As the author/editor of a three volume treatise on New York not-for-profit corporations (available only to lawyers, so please don’t go rushing onto Amazon.com hoping to buy a copy), I have spent the last three weeks updating those volumes to reflect the new law.
I am going to be spending the next three weeks calling every one of my nonprofit organization clients to let them know they probably are not in compliance with the new law, and will need to update how they do business.
While that may sound like an economic windfall to yours truly (lawyers always benefit when the rules change), it is likely to be an economic headache to many small nonprofits in New York State, many of whom are not even aware of the new law or that they are not in compliance.
Many states other than New York are updating their nonprofit organization statutes to bring them in line with recent IRS developments and (especially) impose tighter regulations on how nonprofits handle endowment funds, deal with conflicts of interest, and other matters. Many small nonprofits have been accustomed to running their operations like candy stores: under the new regulatory regime they will increasingly be unable to do so.
If you run a nonprofit, here are some questions you may want to ask your lawyer, right now:
Do we need an audit committee? Many states are now requiring charitable organizations over a certain size ($1,000,000 in annual revenue in New York) to prepare audited financial statements each year and submit them to a state government agency (usually the Attorney General’s office) for review. Where such statements are required, the new laws require the financial statements to be reviewed and approved by an “audit committee” consisting of independent directors (i.e. not employees of the organization).
Smaller organizations – those with $500,000 to $1,000,000 in annual revenue – are often required to prepare and submit reviewed or certified financial statements.
If your organization has more than $100,000 in annual revenue, you should double check with your lawyer to find out if any of these rules apply. If they do, you will need to spend upwards of $10,000 to $30,000 per year to have these statements prepared. If you do not have any independent directors, you will have to find and hire some.
Are we handling “related party” transactions the right way? Among the biggest legal changes for nonprofits involve the way “related party” transactions – an organization’s business dealings with its directors, officers and key employees (such as an executive director) — are handled. The law has always required these to be “fair and reasonable” and “in the best interests of the organization” but the law frequently no longer allows the organization’s “insiders” to make these determinations.
In New York, the new law permits the state Attorney General to sue an organization if he or she determines that a related party transaction was not fair, reasonable, and in the best interests of the organization. The law does not, however, specify the criteria the Attorney General will use in making that determination.
If your organization has informal business dealings with its key players, it’s probably a good idea to have your attorney look at them now and put together any documentation that may be necessary to defend those dealings if and when challenged by state government officials or the IRS.
Do we have a conflicts of interest policy? The IRS requires public charities (those subject to Section 501(c)(3) of the Internal Revenue Code) to adopt a conflicts of interest policy (for an example, see http://institutional.vanguard.com/iam/pdf/IAMNPSCI.pdf). Many states are imposing this requirement as well on all nonprofit organizations.
Do we have a “whistleblower” policy? Many states are also expanding the IRS requirement that public charities adopt a “whistleblower” policy (providing that any employee who in good faith reports impropriety or illegal conduct by the organization shall not be subject to harassment, intimidation or termination as a results) to other types of nonprofits.
Do we have an investment policy? Most states have adopted some form of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), a comprehensive statute that regulates how nonprofit organizations handle their “endowment funds” (monies donated by individuals to achieve a specific purpose). That law requires nonprofits to implement a written investment policy imposing investment guidelines and creating accountability for persons within the organization who handle donor funds.
Do any of our grant documents have out-of-date terms that need to be changed or eliminated? If the documents creating an endowment fund impose conditions that are out of date, illegal or impossible for the organization to satisfy, and the donor is deceased or cannot be located, UPMIFA requires an organization to get the approval of a court or government agency (again, usually the Attorney General’s office) to make any necessary changes.
Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and host of the PBS television series ‘Money Hunt’. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. COPYRIGHT 2014 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC.
