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Wednesday, January 8, 2014

What does your nonprofit need to do to comply with the Nonprofit Revitalization Act? Part 2

What does your nonprofit need to do to comply with the Nonprofit Revitalization Act?  Part 2

We previously discussed 4 of the larger changes that the Nonprofit Revitalization Act makes.  In this post, we follow-up with 6 additional provisions every nonprofit should take into consideration.  For your reference, a copy of the Act is available at http://open.nysenate.gov/legislation/bill/A8072-2013

Additional provisions:

1. Elimination of Types.

Rather than having the four “letter types” of not-for-profit corporations (Types A, B, C, and D) the law will be simplified to have two categories of nonprofits: charitable and non-charitable.

2.Chairman of the Board.

The Act prohibits an employee from serving in the position of chairman of the board. The president and other executive staff are most likely employees.   Confirm your chair, if you have one, is not an employee. Keep in mind, you are not required to have the position of chairman of the board.   This provision does not become effective until January 1, 2015.

3. Compensation.

The Act requires that all compensation paid to key employees, directors and officers be “fair, reasonable, and commensurate with the services provided to the organization.”  Confirm the compensation you pay meets this criteria.   The act also requires that compensation decisions be made by “independent directors”.  In other words, if a director is also an employee, the other directors (and not the interested director) must set his compensation.

4.Related Party Transactions.

The Act prohibits all nonprofits from entering into any related-party transaction unless the transaction is determined by the board to be “fair, reasonable, and in the corporation’s best interest at the time of such determination.”  Any officer, director, or key employee who has an interest in the transaction is required to disclose the material facts concerning those circumstances. 

In any transaction in which a related party has a “substantial financial interest”, the board must (i) consider alternatives prior to entering into the transaction, (ii) approve the transaction by a majority vote, and (iii) contemporaneously document in writing the basis for the approval.

The Act defines a “related party” as (i) any director, officer, or key employee of the corporation or any affiliate of the corporation; (ii) any relative of any director, officer, or key employee of the corporation or any affiliate of the corporation; or (ii) any entity in which any individual described in (i) or (ii) has a 35 percent or greater ownership or beneficial interest or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of five percent. 

A “related party transaction” is defined as any transaction, agreement, or other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the corporation is a participant.

Finally, the related party cannot participate in the deliberations or voting related to such transactions.

5. Transactions Involving Property.

A nonprofit is now allowed to sell, mortgage, lease, exchange and otherwise dispose of real property by majority approval, unless that property is all or substantially all of the assets of the nonprofit, in which case 2/3 approval is still required.

6. New Definition of “Independent Director”

The Act defines an “independent director” as an individual who meets all of the following criteria:

    • has not been an employee of, or does not have a relative that was a key employee of, the nonprofit or an affiliate of the nonprofit in past three years;

    • has not received, or does not have a relative that has received, $10,000 or more in direct compensation from the nonprofit or an affiliate in the last three years (other than expense reimbursement or reasonable compensation as a director);

    • is not a current employee of or does not have substantial financial interest in an entity that made or received payments from the corporation or an affiliate of more than $25,000 or 2% of the nonprofit’s gross revenue for property or services (whichever is less) in the last three years; and

    • does not have a relative who is a current officer of or has a substantial interest in an entity making or receiving payments of a similar amount to the nonprofit in the past three years.

Moisan Legal P.C. is a boutique law firm focusing on representing entrepreneurs and businesses in a variety of legal issues.   Matthew J. Moisan can be reached at 646.741.5222.


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