When incorporating a new nonprofit, it’s important to consider some legal aspects. The first step is to choose the state where the nonprofit will be incorporated. It’s possible to incorporate a nonprofit in any state, regardless of where its activities will be carried out. Once the state of incorporation is chosen, the next step is to draft and file a certificate of incorporation to formally establish the organization. This article addresses the key issues to think about when incorporating a nonprofit.

Which state should we incorporate our nonprofit in?

When deciding where to incorporate, consider two main factors: (1) where the nonprofit will primarily operate and (2) the complexity or burden of complying with a state’s laws and regulations. Some nonprofits choose to incorporate in the state where they will primarily operate, while others choose a jurisdiction based on its flexibility in structuring internal governance.

Certain states, including New York, California, and Massachusetts, have corporate statutes that limit or dictate governance choices and require regulatory notification or approval for significant transactions, such as mergers, significant asset transfers, or dissolution. On the other hand, states like Delaware have fewer rules about how companies should be managed and approved by regulators. The Attorney General of Delaware doesn’t need to review or approve corporate transactions beforehand, and Delaware’s laws governing corporations are more flexible compared to laws in other states.

Before selecting a state for incorporation, it’s important for the organizers to work closely with a qualified attorney to understand the available options. State nonprofit corporation laws govern many aspects of the governance structure, including the minimum size of the governing board, membership rights and procedures, board election and removal procedures, and processes for managing conflicts of interest or conducting an annual audit. Some state laws may also require regulatory or court approval for major transactions. These requirements can significantly impact the time and money needed for compliance as the nonprofit grows and evolves.  

Are there additional requirements when incorporating in a state where we have no operations? 

If a nonprofit is incorporated in a state where it is not primarily operating (known as the state of legal domicile), it must fulfill additional compliance requirements that would not apply if it were incorporated in its state of legal domicile. However, many nonprofits find these extra requirements manageable and worthwhile because of the advantages of incorporating in a state with a more flexible regulatory approach.

1. The nonprofit must have a registered agent in the state where it is incorporated. The registered agent is responsible for receiving legal mail on behalf of the nonprofit, such as service of process. There are corporate filing services that offer registered agent services for a reasonable annual fee.

2. The nonprofit is often required to file an annual report in its state of incorporation. For example, a nonprofit incorporated in Delaware must submit a Delaware Annual Report by March 1st each year, along with a $25.00 filing fee.

3. The nonprofit must also qualify to “do business” in the state where it primarily operates. This involves making an initial filing with the state and then filing annual reports to maintain its status. 

Nonprofit organizations, regardless of where they are incorporated, must register annually with state charity regulatory offices in order to solicit charitable contributions or hold charitable assets in all applicable states, including their state of legal domicile. For example, a nonprofit incorporated in Delaware, located in New York, and soliciting funds in New York is not subject to most of the governance requirements of the New York Not-for-Profit Corporation Law. However, in addition to registering to do business in New York with the New York Department of State, the nonprofit must also register annually with the New York Attorney General’s Charities Bureau, which regulates charitable solicitation and assets within the state. It’s important to note that many states’ laws exempt hospitals, educational institutions, and religious organizations from the charitable registration requirement. The scope of the exemption, as well as the manner of obtaining it, varies from state to state. 

What provisions are required to be included in our certificate of incorporation? 
What provisions are optional?

The certificate of incorporation is a crucial document that establishes a nonprofit organization’s legal and operational framework. Some states refer to this document as the Articles of Incorporation. It outlines the nonprofit’s purpose(s) and provides basic information about its structure and governance. Careful attention to several key issues is required when drafting the certificate to ensure that the nonprofit is formed correctly, eligible for federal tax-exempt status when sought, and compliant with relevant state and federal laws. 

When creating a certificate of incorporation, the required provisions may vary depending on the state’s laws. However, the following are the standard state-required clauses:

1. The legal name of the organization
2. The name and address of the incorporator
3. The purpose or purposes for which the corporation is formed
4. Designation of the secretary of state as an agent of the corporation for receiving legal documents
5. If the corporation must have a registered agent, the name and address of the corporation’s registered agent in the state
6. Whether the corporation will have members or a statement noting that provisions relating to membership will be in the corporation’s bylaws.

Several states also require the names and addresses of the initial directors to be included in the certificate of incorporation. 

When a nonprofit wants to apply for 501(c)(3) tax-exempt status, there are specific requirements to consider. While a corporation can generally be established for any legal purpose, for 501(c)(3) status, a nonprofit corporation must be organized and operated exclusively for one or more of the purposes described in section 501(c)(3) of the Internal Revenue Code. Meeting the first part of this requirement – the “organizational test” – typically requires a nonprofit to include language in its certificate of incorporation that explicitly limits its corporate purposes. The IRS Form 1023 (the application for 501(c)(3) status) states: Your organizing document must restrict your purposes to those described in section 501(c)(3). These purposes include charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.

The instructions for Form 1023 state that it is generally enough to limit a nonprofit’s purposes by referring to section 501(c)(3) to meet the organizational test under section 501(c)(3). The IRS gives an example of an acceptable purpose clause as follows: The organization is exclusively organized for charitable, religious, educational, and scientific purposes under section 501(c)(3) of the Internal Revenue Code or corresponding sections of any future federal tax code.            

Alternatively, a nonprofit organization’s certificate of incorporation can fulfill the organizational test by specifying a particular charitable purpose. If this approach is chosen, nonprofits should be cautious in crafting a purpose description that does not overly restrict the organization’s ability to effectively pursue its broader charitable goals.

According to Form 1023 instructions, the nonprofit’s certificate of incorporation must ensure the permanent dedication of its assets to a section 501(c)(3) purpose. In the event of dissolution, a 501(c)(3) tax-exempt nonprofit must distribute its assets for an exempt purpose described in section 501(c)(3), or to the federal, state, or local government for a public purpose. In some states, nonprofits can rely on state law to establish the permanent dedication of assets for exempt purposes. 

Form 1023 instructions offer the following example of an acceptable dissolution clause: 

Upon the dissolution of this organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code or corresponding section of any future federal tax code or shall be distributed to the federal government, or a state or local government, for a public purpose.

Nonprofits may want to include a provision setting forth the statutory limitations or prohibitions applicable to 501(c)(3) nonprofits regarding lobbying and political campaign activities. 

How long does it take for the certificate of incorporation to be filed? 

States may take anywhere from a few days to a few weeks from the submission date to file the certificate of incorporation. The speed of incorporation is another factor that may influence the decision of where your nonprofit should incorporate. It is easier and faster to incorporate in some states than others. Many states offer expedited filing for an additional fee, including 24-hour, same-day, or even 2-hour expedited filing.

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501(c)(3) Charitable Organizations

Purposes
501(c)(3) organizations operate exclusively for charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  For purposes of section 501(c)(3), the term charitable is used in its generally accepted legal sense and includes:

• Relief of the poor, the distressed, or the underprivileged
• Advancement of religion
• Advancement of education or science
• Erecting or maintaining public buildings, monuments, or works
• Lessening the burdens of government
• Lessening neighborhood tensions
• Eliminating prejudice and discrimination
• Defending human and civil rights secured by law
• Combating community deterioration and juvenile delinquency

Public Charity vs. Private Foundation
Every 501(c)(3) organization is classified as either a private foundation or a public charity. Private foundations and public charities are primarily distinguished by the level of public involvement in their activities. Public charities normally receive a significant portion of their financial support from the general public or governmental units and interact more with the public. 

A private foundation is typically funded by a single person, a family, or a company. Private foundations are subject to stricter operating restrictions because they are less open to public scrutiny than public charities. They are subject to certain excise taxes for failure to comply with those restrictions.  

Private foundations are further classified between private non-operating foundations and private operating foundations. The main difference is that private operating foundations actively “operate” or conduct their own charitable programs. Because of this major difference, private operating foundations are subject to the same regulations as public charities on a few key matters, which are generally more favorable than the rules applicable to non-operating foundations.

Lobbying
Lobbying is any attempt to influence legislation, including acts, bills, resolutions, or ballot initiatives by Congress, state legislatures, local councils, or similar governing bodies.

A public charity is not permitted to engage in substantial legislative activities. If lobbying activities are substantial, a 501(c)(3) organization may fail the operational test, risk losing its tax-exempt status, and, in certain cases, be liable for excise taxes.

Like public charities, private foundations will jeopardize their 501(c)(3) status if lobbying is a substantial part of their activities. However, private foundations are subject to a significant excise tax on their lobbying expenditures, such that the excise tax generally acts as a lobbying prohibition for private foundations.  A limited exception to this lobbying prohibition, known as the “self-defense” exception, applies if the communication addresses legislation that affects the foundation’s existence, powers and duties, tax-exempt status and/or deductibility of contributions.

Political Campaign Activities
All 501(c)(3) organizations are prohibited from directly or indirectly participating in or intervening in any political campaign on behalf of (or in opposition to) any candidate for elective public office.  Prohibited political campaign activities include any statements made by or on behalf of the organization in favor of or in opposition to any candidate for public office and contributions to political campaign funds.  Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of excise taxes on the organization.

Tax-Deductibility and other Characteristics 
Donations to 501(c)(3) organizations are tax-deductible, though the deductibility limits vary between public charities and private foundations (and generally are more generous for public charities). In addition, 501(c)(3) organizations are generally exempt from state income tax exemption and state sales tax exemption (although some states only grant sales tax exemption to a narrow subset of 501(c)(3) organizations).  501(c)(3) organizations are also generally eligible for the nonprofit mail rate, which provides a significant discount. 

Applying for Tax-Exempt Status
Organizations seeking 501(c)(3) tax-exempt status must file the Form 1023 or Form 1023-EZ.  Churches that meet the requirements of IRC Section 501(c)(3) are automatically considered tax-exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS, although many churches choose to apply for tax-exempt status to obtain the certainty of the IRS’s determination. A written IRS determination can also simplify applying for other benefits, like state tax exemptions.

501(c)(4) Social Welfare Organizations

Purposes
501(c)(4) organizations must be operated exclusively for the promotion of social welfare.  The tax regulations specify that an organization operates exclusively to promote social welfare if it is primarily engaged in promoting the common good and general welfare of the people of the community.

Lobbying
501(c)(4) organizations may engage in unlimited lobbying related to their exempt purposes without jeopardizing their tax-exempt status.  This ability to engage significantly in lobbying activities is a key reason many organizations choose the 501(c)(4) designation.

Political Campaign Activities
501(c)(4) organizations can engage in political campaign activities if not the organization’s primary activity. 

Tax-Deductibility and other Characteristics
Donations to a 501(c)(4) organization are not tax-deductible. In addition, the names and addresses of donors do not need to be disclosed to the IRS in its annual Form 990 filing.  By contrast, all 501(c)(3) organizations must disclose their donors to the IRS in their Form 990 filings, and information about private foundation donors is made publicly available by the IRS.  Some organizations may also choose to seek 501(c)(4) status (especially as an alternative to 501(c)(3) private foundation status) if their donors do not need the benefit of tax-deductibility of their donations, and they would benefit from the more flexible rules applicable to 501(c)(4) organizations.

Applying for Tax-Exempt Status  
Organizations seeking 501(c)(4) tax-exempt status must file the Form 8976 Notice of Intent to Operate Under Section 501(c)(4), generally within 60 days of its formation. In addition to submitting Form 8976, organizations operating as 501(c)(4) organizations may also choose to file Form 1024-A to request recognition of tax-exempt status. Submitting Form 1024-A does not relieve an organization of the requirement to submit Form 8976.

501(c)(6) Business Leagues

Purposes
501(c)(6) organizations include business leagues, chambers of commerce, real-estate boards, and boards of trade.  A business league, which is perhaps the most common type of 501(c)(6) organization, is an association of persons having a common business interest, the purpose of which is to promote such common business interest and not to engage in a regular business of a kind ordinarily carried on for profit. Business leagues include trade associations and professional associations. To be considered exempt, a business league’s activities must be devoted to improving the business conditions of one or more lines of business as distinguished from performing particular services for individuals. 

Lobbying
501(c)(6) organizations may conduct unlimited lobbying to further their exempt purposes without jeopardizing their tax-exempt status.  An organization that engages in these activities must give its members notice of amounts of membership dues allocable to nondeductible lobbying expenditures; failure to provide such notice may subject the organization to a proxy tax on the amount of the expenditures.

Political Campaign Activities
501(c)(6) organizations are permitted to engage in political campaign activities if they are not the organization’s primary activity.

Tax-Deductibility and other Characteristics
Donations to a 501(c)(6) organization are not tax-deductible. 

Applying for Tax–Exempt Status
Organizations seeking 501(c)(6) tax-exempt status must file the Form 1024 with the IRS. 

Keep in mind that organizations engaging in lobbying and political campaign activities may also be subject to federal, state, and, in some cases, local lobbying registration and disclosure reports, depending on relevant factors, including the amount spent on the activities, whether lobbyists are retained, and the locations of such activities.  

Choosing the Classification of Your Organization

It is critical to correctly determine which tax-exempt status is most appropriate based on your organization’s key objectives.  Failure to apply for and obtain the correct tax-exempt status may subject an organization to unanticipated regulatory burdens and constraints and leave it unable to accomplish its essential goals.  While seeking reclassification of an organization’s tax-exempt status is possible, it can be a slow and complex process. As such, it is best to apply for the most strategically beneficial tax-exempt status from the outset.

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Many NIL collectives have been structured as nonprofit entities which have sought and obtained 501(c)(3) public charity status from the IRS.  These collectives usually partner with other charities to establish NIL opportunities for student-athletes.  Under these arrangements, the nonprofit collective typically pays the athlete in exchange for his or her promotion of the partner charity through personal appearances, speaking engagements and social media, or through participation in sports clinics for community youth and the like.

This past year, the IRS announced that many NIL collectives structured as nonprofit organizations fail to qualify as tax-exempt entities.  According to a generic legal advice memorandum (GLAM), many of these entities operate primarily for the private benefit of student-athletes, and thereby fail the “operational test” under Section 501(c)(3) of the Internal Revenue Code (the “Code” or “IRC”), which requires that tax-exempt organizations operate primarily for exempt purposes.  As a result of the perspective shared in this GLAM, the IRS has begun denying NIL collective applications for tax-exemption, as reflected in two recently released IRS Private Letter rulings (the “Rulings”) (Private Letter Ruling 202414007 and Private Letter Ruling 202416015).  

According to the IRS, the nonprofit NIL collectives described in these Rulings and in the GLAM further the following stated purposes: (i) providing opportunities for student-athletes to be paid for the use of their NIL, and (ii) contributing “to the greater good of the community” by raising awareness and support of their partner charities’ missions.  This article includes further discussion of the regulatory obstacles these nonprofit NIL collectives are facing, and the implications for collectives operating with similar missions.

IRS Rules Governing Tax-Exempt NIL Collectives

In order to obtain and maintain tax-exemption under IRC Section 501(c)(3), an entity must be organized and operated exclusively for one or more of the exempt purposes set forth in IRC Section 501(c)(3), which may be charitable, educational or scientific in nature (Treasury Regulation Section 1.501(c)(3)-1(a)(1)).

As discussed above, to be regarded as “operated exclusively” for exempt purposes, an organization must be engaged “primarily” in activities which accomplish exempt purposes (Treas. Reg. Section 1.501(c)(3)-1(c)(1)).  The presence of “a single nonexempt purpose, if substantial in nature, will preclude exemption regardless of the number or importance of truly exempt purposes” (GLAM, citing Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945)).

In addition, to be regarded as organized and operated exclusively for exempt purposes, an organization must serve a public rather than a private interest (Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii)).  To meet this requirement, an organization must establish that it is not organized or operated for the benefit of private interests, including for example, designated individuals, the founders of the organization or their family, or persons controlled, directly or indirectly, by such private interests.

That said, private benefit will not prevent an organization from obtaining exemption if the private benefit is incidental in both a “qualitative” and “quantitative” sense.   

The IRS has stated that to be “qualitatively incidental,” the private benefit must be a “byproduct” of the exempt activity or a “necessary concomitant” to the “accomplishment of the exempt purpose” (GLAM).   A private benefit that is a “direct or intentional” benefit to designated or identifiable individuals would not be “qualitatively incidental” (GLAM).  

To be “quantitatively incidental,” the private benefit “must be insubstantial in amount when compared to the overall public benefit conferred by the activity” (GLAM).

IRS’ Analysis and Conclusion Regarding Nonprofit NIL Collectives

According to the IRS, the nonprofit NIL collectives described in the Rulings and the GLAM operate primarily for the private benefit of student-athletes, in violation of the “operational test” under IRC Section 501(c)(3).  The following are key factors that went into its determination.  The IRS concluded that:

1. Providing paid opportunities for student-athletes is a primary purpose of the nonprofit NIL collectives’ activities — which means these collectives serve a private, rather than a public interest.

2. The private benefit to student-athletes is not “qualitatively incidental” to the collectives’ exempt purposes.  This benefit is not a “necessary concomitant” to accomplishing their exempt purpose of supporting partner charities.  According to the IRS, there “are alternative means by which you could promote local charities without conferring a substantial private benefit on these student athletes, such as by encouraging volunteerism” (Private Letter Ruling 202414007).

3. The private benefit to student-athletes is not “quantitively incidental” when compared to the overall public benefit conferred by the collectives’ activities.  In the GLAM, the IRS noted that many collectives pay 80 to 100 percent of all donations to student athletes.  The IRS said, “for payouts anywhere within this range, the benefit to private interests is substantial by any measure and cannot be dismissed as merely incidental to [their] other purposes and activities” (GLAM).

4. Student-athletes being paid by nonprofit NIL collectives are not themselves a recognized charitable class.  The IRS noted in the GLAM that “absent a finding that NIL collectives select student athletes for participation based on need, such that their activities could be considered” as being “conducted for the relief of the poor or distressed, …payments to the student-athletes are properly regarded as serving private rather than public interests.”

The Future of Nonprofit NIL Collectives

As discussed herein, the IRS has begun denying tax-exempt status to some nonprofit NIL collectives for the reasons discussed above.  For similar reasons, the IRS has indicated that it may reconsider the exempt status of nonprofit NIL collectives that have already been granted exemption (GLAM).¹  These actions also have implications for donors, who cannot take a charitable deduction for contributions to nonprofit collectives whose exemption has been denied or revoked.

With the above in mind, it is critical for nonprofit NIL collectives to review the Rulings and the GLAM with counsel and ensure that their purposes and activities do not confer impermissible private benefits to student-athletes.  Nonprofit NIL collectives should also consult with counsel on the pros and cons of converting to a more flexible legal form, including, for example, a for-profit limited liability company structure, which is not subject to limitations on the type of activities it facilitates.

1 However, the IRS has also noted that in reconsidering the exempt status of such collectives, it may be appropriate to grant relief under IRC 7805(b) to limit the retroactive effect of any such revocations.

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Here are some key elements to include in the written agreement and other important considerations as you move forward.

Term and Termination

Any contract, including one for professional services, should define the term of the agreement.   The term includes an effective date and a termination date.  The duration of a contract can vary, but if you aren’t sure the relationship will be a good fit, consider a shorter initial period of three to six months. A renewal can be quickly negotiated if the partnership is successful. 

Termination provisions allow either party to cancel the contract under specific circumstances.  Typically, professional services contracts allow either party to terminate upon written notice of thirty or sixty days.  It is also common to include a provision for termination “for cause,” in the event one party materially breaches the contract and fails to fix (or cure) the problem within a specified time frame.  

The organization should consider a provision for immediate cancellation in the event its good reputation is threatened.  This protection is important if the influencer’s unforeseen behavior garners bad press and reflects negatively on the charity through its association with the influencer. 

Code of Conduct

Consider including a code of conduct provision requiring the influencer to agree to online conduct that won’t interfere with the charity’s ability to fulfill its charitable endeavors, harm the charity’s fundraising efforts, or jeopardize the charity’s tax-exempt status.  The contract can require that the influencer refrain from featuring explicit music or language in its posts for the charity and prohibit the influencer from promoting other organizations in the same content created pursuant to its agreement with the charity.  

Intellectual Property

The contract should spell out which party owns any intellectual property (“IP”) developed as part of the agreement.  In addition to the usual grant of a limited license to use the organization’s logo and other trademarks, if the organization wants to secure ownership of any IP developed as part of the partnership, the contract should stipulate in clear terms that any IP created under the agreement (e.g., trademarks or copyrights) belongs to the organization.  Content can include photographs, images, videos, as well as other media created within the scope of the work done for the organization.  In some cases, an influencer may want any content that they develop and post on their own social media account to be their owned IP (excluding only the IP elements incorporated in the content that the charity may own). Ultimately, it’s most important to set clear expectations around IP ownership developed within the scope of the partnership to avoid future conflicts due to a lack of a meeting of the minds. 

Compensation

The contract should clearly state the compensation terms, including when payments are due and which expenses (if any) will be reimbursed.  It should make clear what is owed if the contract is terminated early.  If the influencer posts content encouraging people to donate to the organization, this could imply their status as a professional fundraiser, triggering charitable solicitation registration and reporting requirements in several states.  While there are certainly resources available to meet such requirements, the regulatory obligations it places on the influencer may discourage them from doing so, so be sure to have a clear discussion upfront if you are considering paying an influencer in connection with any fundraising efforts. 

Review and Approval of Content

While organizations may want to review and pre-approve any social media posts, many influencers will resist having their content, which are often primarily disseminated from their own social media accounts, managed in this way, particularly if they are doing so on a voluntary and uncompensated basis.  Your organization will need to strike a balance by being clear with its expectations upfront and thoroughly vetting the influencer’s content. One option is to pre-approve the general types of content, and provide accurate, vetted information that the influencer can use, while giving the influencer a choice of the ultimate details to be communicated.   This type of provision may require negotiation to reach mutually agreeable terms.

If a strict pre-approval process is not implemented, one other way to mitigate risk is to require that the influencer take down any posts that don’t meet the approval of the organization or contradict the vetted information provided to the influencer. 

FTC Rules 

The Federal Trade Commission (FTC) has published regulations on principles of advertising, also called the FTC Guides, which include disclosures influencers must provide to make it clear they have received compensation (in the form of money, products, and so on) for the content they are publishing.  The contract with an influencer should include the requirement to abide by the most recent FTC Guides.  

Representations and Warranties

The contract should include a representation and warranty from the influencer that the content they create will not infringe upon the rights of any third parties, particularly third-party intellectual property rights. This language is essential because it provides grounds for termination for cause as a material breach of the agreement.  

Templates for Efficiency

If the organization is contemplating several contracts, either with the one influencer or many, consider creating a template that can be adapted for different purposes.  For the same influencer, the organization can have an umbrella contract and attach different statements of work, depending on the social media campaign the influencer is working on. 

The rise of social media influencers already plays an important role for charities looking to expand their brands (charities are brands too!) and reach a wider audience to support their cause.  If your organization chooses to work with influencers, formalizing the relationship through a written agreement will help reduce ambiguity, ensure alignment, and minimize risk for your organization.

The post Does Your Nonprofit Want to Hire an Influencer?  What to Keep in Mind. appeared first on Perlman & Perlman.

While there is no actual codified definition, MRIs are generally understood to be risk-adjusted or “prudent” market-rate investments.  It is a financial vehicle made out of the organization’s investment assets (e.g., its endowment) rather than its program assets.  Unlike its counterpart, the Program Related Investment (PRI), which has the primary goal of accomplishing a charitable purpose, an MRI seeks to generate a market rate of return on capital while also furthering a social purpose.  Put another way, PRIs offer solutions where the markets do not have a solution, while MRIs use the power of the market to create impact. 

It’s important for foundations seeking to establish their investment strategy to understand the key legal and structural differences between PRIs and MRIs.  Since the requirements to qualify as a PRI are more stringent than an MRI, a PRI avoids being classified as a jeopardizing investment, and can be counted towards a foundation’s annual distribution requirement.  

An MRI, on the other hand, is a commercial investment that also has a goal to create social impact but is not subject to the stringent standards of the PRI.  Consequently, an MRI does not count towards a foundation’s annual requirement and is not excluded from the rules governing jeopardizing investments.  In addition, in calculating the amount of a foundation’s five percent annual distribution requirement, MRIs are not excluded from the foundation’s assets, as is the case with PRIs. (For an in-depth discussion of PRIs, please read Are You Looking to Make an Impact? Consider a Program Related Investment).  

While the rules governing the MRI are not as rigid as those governing PRIs, there are a few key ones that MRIs must comply with. The “Jeopardizing Investments” rule, found in Section 4944 of the Internal Revenue Code (“Code”), imposes an excise tax on private foundations that invest “any amount in such a manner as to jeopardize the carrying out of its exempt purposes.” A private foundation and its management may be subject to excise taxes for making a jeopardizing or imprudent investment.  Because the Jeopardizing Investments rule applies to MRIs, MRIs must be comprised of prudent investments.

MRIs must also comply with the “Excess Business Holdings Rule.” Section 4943 of the Code states that a foundation, together with its disqualified persons, may own no more than twenty percent of the voting stock of a business enterprise (some exceptions may apply). 

Since MRIs are not treated as a charitable activity but rather as commercial investments, they must meet the prudent investor standards under state and federal law.  The applicable State-enacted version of The Uniform Prudent Management of Institutional Funds Act (UPMIFA) applies a standard for prudent investments whereby “each person responsible for managing and investing an institutional fund shall manage and invest the fund in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”  In addition, UPMIFA lists a number of factors that must be considered, if relevant, when making an investment.  Most states have adopted a form of UPMIFA. 

Developing an MRI Strategy

The board of an organization that is considering embarking on an MRI strategy should, as a matter of good governance, consider its rationale. Whether as a stand-alone policy or a policy that is incorporated into the organization’s investment policy, drafting a written MRI Policy should be the board’s first step.  The discipline of drafting an MRI policy will ensure that everyone is in agreement when it comes to incorporating MRIs into the overall investment strategy. 

The substance of the MRI Policy will depend in part on the organizational view of MRIs and their purpose.  Some may view MRIs from a programmatic standpoint, wherein the MRI serves as a tool available to the organization in implementing its philanthropic strategy.   Other organizations may view MRIs from an investment perspective and consider it as an opportunity to make a market rate investment that also happens to foster social impact.    

The following is a list of important questions that should be asked when drafting an MRI Policy. 

• Why Does the Organization Want to Make an MRI? 

It’s helpful for an organization to consider what it believes is the key objective for entering into an MRI strategy.  The organization should consider what it hopes to accomplish by making an MRI.  If the full board is in agreement regarding the rationale or objectives for entering into MRIs, it will help support the development of a uniform set of metrics used by the organization when assessing the success of MRIs in achieving those goals.

• Does the organization have the skills and staffing within the organization to carry out an MRI Strategy?  

In order to implement an MRI, organizations will need to rely on individuals with various expertise including investment, programmatic and legal experience.  Executives and the board should determine whether they can utilize in-house staff or board members, or whether they should consider engaging consultants.

The board should take into consideration if it will require a legal opinion that the potential MRI does not qualify as a jeopardizing investment. The size of the MRI relative to the organization’s investment portfolio may be a factor for consideration when determining whether a legal opinion is warranted.  

• Who will be responsible for oversight?  

Prior to entering into an MRI strategy, the board should consider who will be responsible for oversight of the strategy.  If the organization is considering the MRI as a key tool in accomplishing its philanthropic objectives, it may make sense to have both an advisor with programmatic experience as well as one with investment experience onboard. 

On the other hand, if the foundation views the MRI primarily as a market rate investment that also has social impact, a person or committee with investment experience, guided by a board-approved statement of social impact objectives, may suffice.  The investment committee of the board may be an appropriate oversight body for this responsibility when aligned with the foundation’s MRI objectives.  

• What will the balance be between investment risk and social return?

In advance of embarking on an MRI strategy, the board should determine whether it is willing to take a greater financial risk (while still complying with UPMIFA) to the extent the social returns of the investment have the potential to be great.  It may be that, regardless of the potential for social impact results, the board’s appetite for investment risk will remain the same.   Making a riskier investment may require altering existing investments within the organization’s portfolio in order to comply with UPMIFA’s requirement that each individual investment be reviewed in the context of the entire portfolio, in accordance with prudent investor standards.   

Consider the scenario in which the financial rewards are substantial, but the social impact is not as significant.  The answer to these questions will largely depend on how the Board views mission-related investing and why it has decided to enter this arena.  A board would be well-advised to determine in advance of entering into an MRI how it feels about risk and what the appropriate balance is in guiding its MRI strategy.  

• How will the organization measure the success of a Mission Related Investment? 

In reviewing the performance of an MRI, members of the board and management of the foundation should discuss how they intend to measure success.  The foundation could establish that success is based on the investment generating a minimum level of return, while achieving a loosely defined social impact.  For example, investing in a clothing manufacturer that uses environmentally friendly dyes for its fabrics could result in generous returns to its investors but only modest results in terms of reducing harmful environmental impact.  

With a benchmark focusing significantly on market rate returns, an investment that generates modest financial returns but generates substantial social impact may be considered unsuccessful because the return on investment was too low.  The members of the board should consider how much of a social impact they are looking to make through any MRI.   

In Conclusion

The philanthropic sector has come to understand that aligning investments with mission and values can be financially rewarding.  A greater number of foundations have decided to take a portion of their endowment and invest it in ways that align with their mission. Some have decided to invest their entire investment portfolio or endowment in line with their mission.

I predict that in the next few years we are going to see a dynamic shift in the way funders and their boards view their fiduciary obligations. Foundations contemplating entering into MRIs would be well advised to create a policy that articulates how MRIs can be thoughtfully carried out to achieve the desired investment and social objectives.

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Why do we need bylaws? 

Bylaws are important for many reasons, legal and practical. Each state has specific corporate laws that regulate the actions taken by nonprofit boards. Bylaws distill those laws into a series of clear procedures for the board to follow, providing an operational framework and helping to ensure that the actions taken are legally compliant. 

Who should draft our bylaws?

Ideally, drafting bylaws is a collaborative process between the board and an attorney with nonprofit expertise. Your organization’s governance practices will be dictated by the laws of the state in which your organization is incorporated, as well as federal tax laws applicable to exempt 501(c)(3) organizations. 

Nonprofit corporate laws vary from state to state, some with more specific requirements than others. There are areas of the law that provide the board with significant flexibility in deciding how it chooses to operate, so certain sections of the bylaws can be customized to reflect the board’s preferences on governance procedures. An experienced attorney will know the corporate laws of the state in which your nonprofit is formed and be able to advise your board on its legal requirements, optional provisions, and best practices. 

Copying another nonprofit’s bylaws or downloading a sample from the internet may seem like a good option, but it can be costly in the long run.  If your bylaws are not compliant with the laws of the state in which your nonprofit is formed or are not tailored to your board’s needs and preferences, you may face trouble down the road.  In a worst-case scenario, the actions of a board can be challenged by regulators or in court if the board has not been following its bylaws or its bylaws are not legally compliant. 

What should our bylaws cover?

Typical provisions in nonprofit bylaws include –

• Size of the board – minimum (and maximum, if any) number of directors 
• Procedures for the election, resignation, and removal of directors.
• Directors’ term lengths and term limits (if any). 
• Notice requirements for regular meetings and special meetings of the board. 
• Quorum requirements (the minimum number of directors that must be present at a meeting in order to take action). 
• Approval requirements for routine board actions and special approval requirements for major transactions. 
• Procedures by which the board can take action without meeting.
• Procedures for forming and authorizing committees. 
• Procedures for the election, resignation, and removal of officers.
• Officer titles and responsibilities. 
• Indemnification of directors and officers. 
• Procedures for amending the bylaws.
   

Can we change our bylaws? 

Yes! Bylaws can, and often should, be amended to better match the organization’s practices and goals. The bylaws that worked for your nonprofit in its start-up phase frequently need to change as your organization grows and develops.  Laws also change from time to time, so we recommend having an experienced attorney review your bylaws with your board every few years. 

There’s a lot more we can say about governance and bylaws, but we’ll save that for future articles.

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State of the Nonprofit Sector 

Tim Delaney, President & CEO, and Donna Murray-Brown, Vice President of Strategy and Development at the National Council of Nonprofits, presented an overview of the charitable community.  Included in their discussion was the current scale and scope of the sector, external threats to its sustainability, and ideas for how state charity regulators and members of the sector can continue to work together to better protect and serve the community.  

External threats include an increased demand for nonprofit services in an environment of increased costs and reduced contributions.  At the same time, nonprofits are faced with the antiquated and broken systems of government contracts and grants while the sector is experiencing a workforce shortage.  This has weakened the delivery of services to the public.  

Charity regulators and nonprofits are encouraged to work together to protect and serve the public by focusing their efforts on preventing bad actors from misuse of the charitable nonprofit system and on stopping scam artists from masquerading as charitable nonprofits. 

Lessons in Nonprofit Governance from the Big and Small Screen

Gene Takagi, principal of Neo Law Group, entertained participants with key points about “good and not-so-good governance” by quoting characters from popular television shows and movies. My favorites included Ted Lasso (“Believe”), Captain America (“How do we do this? As a team!”), Spiderman (“With great power comes great responsibility”) and Dumbledore (“it takes a great deal of bravery to stand up to your enemies, but a great deal more to stand up to your friends”).   Gene used the quotes to walk participants through key issues of the duties of care and loyalty, delegation, trust and reliance, board composition and vacancies, succession planning, prohibition of private benefits, as well as governance and charitable solicitations.  For more detail, read Gene’s Lessons in Nonprofit Governance from the Screen.

Purpose Driven Board Leadership

Dani Robbins, Director of Governance Strategy at Board Source, delved into a new way of framing nonprofit board members’ roles through a discussion about purpose-driven board leadership which prioritizes purpose and mission over the organization’s needs.  In summary, this framework is premised upon four principles. 

Purpose Before Organization 

Prioritizing the organization’s purpose and the problems it addresses versus the organization as an entity by reframing the “duty of loyalty as the center of its own gravity” to how the organization can best steward its resources to serve its purpose.

Respect for Ecosystem 

Acknowledgment that because an organization’s actions have an impact on the ecosystem it requires an obligation to consider the organization’s actions as part of its decision-making processes. 

Equity Mindset 

Commitment to advancing equitable outcomes, avoiding ways in which the organization’s work may reinforce systemic inequities and being willing to break down barriers that may have been created by the organization in the past. This must be applied across a number of areas including allocation of the organization’s resources, programmatic oversight, and creating a diverse and inclusive board. 

Authorized Voice and Power 

Recognition that the organization’s power and voice must be informed and authorized by those who are impacted by the organization’s work, which requires decisions to be made in the context of real understanding of community assets, needs, preferences, and aspirations, listening to community needs and experiences, and sharing power by inviting individuals to the board who have relevant lived experiences.  

Reframing for purpose requires a shift in focus from the board’s traditional position of operating in service to the organization to a primary responsibility for sustaining the organization and its ability to exist in service to its mission and to its service for the public good with a primary responsibility to steward organizational capacity such that it maximizes positive effect to that core purpose. 

The Uses of Different Business Structures by Charities

While the agenda promised a discussion of “some of the latest developments in what can be complex arrangements and structures in the section,” this session focused on just one – the Versatile LLC. Sharon Lincoln, Partner with Casner & Edwards, LLC, shared her insights about the Versatile LLC in the session “What Board Members and State Regulators Need to Know”.  

She explained that a limited liability company (LLC) is the U.S. version of a private limited company, one that provides flexible tax treatment and limited liability for its members.  It offers three options for the tax classification -corporation, partnership, or disregarded entity.  Ms. Casner then focused her discussion on answering the following three questions. 

Can an LLC operate for philanthropic purposes? 

The short answer is yes, but it requires a review and understanding of statutory considerations, the LLC’s certificate of formation and operating agreement, as well as who or what are the members of the LLC and how the activities of the LLC will be funded.

Can an LLC operate as or be a 501(c)(3) organization? 

A single-member LLC may be a subsidiary of a 501(c)(3) organization (see also IRS Notice 2021-56 which permits an LLC to apply on its own for recognition as a 501(c)(3) under certain circumstances). 

When can an LLC be useful to a charity?

This answer depended upon the various forms of corporation, partnership, or disregarded entity.

The discussion concluded with some state-specific considerations, such as what purposes the LLC statute permits and charity bureau oversight in related-party transactions, mergers, asset transfers and dissolution. 

State Update

Unfortunately, noticeably lacking in this year’s conference was a robust discussion about the state regulators’ enforcement efforts.  Only twenty minutes of the five hours allocated were devoted to sharing enforcement updates.  The Annual Report on State Enforcement and Regulation, which highlights enforcement actions in the areas of deceptive solicitations, governance and trusts and estates, as well as summarizes outreach efforts and published guidance, transaction reviews and updates regarding regulations and legislation was provided with the conference materials.  It was not, however, a substitute for the usual color and insight that have been shared with conference attendees in the past, a key incentive for attendance by members of the sector. 

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Under the Internal Revenue Code, all 501(c)(3) organizations are prohibited from participating in any political campaign on behalf of or in opposition to any candidate for elective public office.  This includes contributions to political campaigns or public statements of position made on behalf of the organization in favor of or in opposition to any candidate for public office.  The IRS explains on its website that non-partisan voter registration and get-out-the-vote drives may be permissible as long as they do not bias, favor or oppose one candidate over another, or have the effect of favoring a candidate or group of candidates.   For private foundations, there are more specific rules restricting their grantmaking for voter registration activities.  

Although public charities are prohibited from engaging in political campaign activities on behalf of or in opposition to candidates, the IRS states that “The political campaign intervention prohibition is not intended to restrict free expression on political matters by leaders of organizations speaking for themselves, as individuals. Nor are leaders prohibited from speaking about important issues of public policy. However, for their organizations to remain tax exempt under section 501(c)(3), leaders cannot make partisan comments in official organization publications or at official functions of the organization.” (IRS Rev. Rul. 2007-41).

If you lead or work for a public charity and plan to get involved in political activities in a personal capacity, you should keep the following guidelines and best practices in mind.    

• Employees who endorse or support candidates, make public comments in person, express themselves in writing or online, or engage in other electioneering activities, should refrain from using organizational titles or the organization’s name while making such endorsements or expressing such support.  
• If an employee is identified by name or title in public communications, the employee should include this statement: Titles and affiliations of each individual are provided for identification purposes only and do not reflect the views of the organization or imply an endorsement by the organization. 
• Organization leadership and employees who use personal email communications, personal social media platforms, and any online platforms not affiliated with the organization to communicate about or engage in political campaign activities should include the following disclaimer in the ‘About/Bio’ section and where possible, at the end of such communications:  All personal views and opinions expressed are my own and do not represent or reflect the views of any organization.  Although this disclaimer will not provide absolute cover, its inclusion helps to draw a clearer line between the individual’s affiliation with an organization and their rights as a private citizen.
• Organization representatives cannot support or oppose candidates at organization-sponsored events.  For example, an employee should not, while attending a charity-sponsored event, wear any political t-shirts, buttons, hats, etc. 
• Employees should not use organizational resources, including phones, copiers, computers, office space, email addresses, office addresses, organization name, organization online and social media platforms, donor or mailing lists, for supporting or opposing candidates.  

If you lead or work for a public charity, consider the following tips to help keep your organization in compliance during election season.   

• Organization leaders should provide written notice to members of the Board, staff, and volunteers of its policy against using organizational resources for political campaign activity.  In addition to developing a policy on political activities, leaders should regularly update the policy and train the Board, staff, and volunteers.

• Charities should not report or comment on staff and volunteer personal campaign intervention activities in the charity’s newsletter, on its websites, or any social media accounts.  
• When dealing with the public on issues relating to an election, charity spokespersons should regularly include disclaimers that the charity cannot and does not endorse political candidates (The organization can post a disclaimer on the charity’s website to this effect). While such disclaimers will not excuse partisan activity, they can help explain that a charity’s public communications are not intended to support or oppose candidates, particularly where members of the public might construe certain communications to involve political campaign intervention. 

When it comes to political campaign activities, public charities have different restrictions than the individuals who lead and work for them have in their personal capacities.  That said, to help keep your organization out of trouble, the best thing you can do is to understand the rules and make sure there is a clear line between what you do in your personal capacity from that of the organization you work for.

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While a nonprofit entity is the most typical structure for an organization seeking to create positive social impact, many mission-driven entrepreneurs are choosing for-profit vehicles to achieve their goals. To determine if a nonprofit organization is the right structure for your vision, you must understand what is required to obtain and maintain nonprofit (and tax-exempt) status. 

What Does It Mean to be a Nonprofit Organization? 

First, it is critical to understand the core legal requirements and restrictions of being a nonprofit to determine if it is the right fit for your venture.¹  You may be wondering if “nonprofit organization” and “tax-exempt organization” are interchangeable terms. Although most nonprofit organizations are also tax-exempt, these terms do have different meanings. 

The term ‘nonprofit’ is typically used to refer to an organization’s legal form under state law. Most often, nonprofits are formed as corporations, but other legal forms, such as trusts or unincorporated associations, can be used. A corporation is the most popular legal structure for nonprofits, however, and offers many benefits to mission-driven ventures, including greater liability protection for the incorporated nonprofit’s directors and officers. 

A key distinguishing feature of nonprofit entities from for-profit entities is that nonprofit entities cannot distribute profits to individuals who control the organization. Unlike a for-profit corporation, a nonprofit corporation is not owned by anyone and does not have shareholders. 

Federal Tax-Exempt Status

The purposes and activities of the nonprofit will help determine whether it will qualify for exemption from federal income tax. Many nonprofit organizations are tax-exempt under section 501(c)(3) of the Internal Revenue Code (“Code”), which is the designation for charitable organizations. 501(c)(3) organizations are classified as either public charities or private foundations, depending mostly on whether they are diversely funded (public charity) or primarily funded by one or a few sources (private foundations). Other sections of the Code provide tax-exempt status to non-charitable nonprofits, the most common of which are 501(c)(4) social welfare organizations, 501(c)(6) business leagues, and 501(c)(7) social clubs. For this article, we will focus on the requirements of the 501(c)(3) public charity.

To obtain 501(c)(3) public charity status, an organization must be organized and operated exclusively for exempt purposes. Exempt purposes under section 501(c)(3) of the Code include those that are charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety. To be organized exclusively for exempt purposes means that the organization’s governing documents must describe its exempt purposes and limit the use of its assets exclusively to those exempt purposes. To be operated exclusively for exempt purposes is, in large part, a negative test, i.e. an organization will not be considered to be operated exclusively for exempt purposes if (1) more than an insubstantial part of its activities is in furtherance of a non-exempt purpose, or (2) its net earnings inure in whole or in part to the benefit of private individuals. 

If more than an insubstantial part of the organization’s activities is not in furtherance of an exempt purpose, the IRS may deny or revoke the organization’s exempt status. To maintain 501(c)(3) status, an organization must do the following. 

• Not participate in political campaigns of candidates for local, state, or federal office
• Restrict its lobbying activities to an insubstantial part of its total activities
• Ensure that its earnings do not inure to the benefit of any private shareholder or individual;
• Not operate for the benefit of private interests such as those of its founder or the founder’s family
• Not operate for the primary purpose of conducting a trade or business that is not substantially related to its exempt purpose

Key Reasons Why You Should, or Should Not, Form a 501(c)(3) Nonprofit Organization

Deciding on whether a 501(c)(3) nonprofit entity is the right legal structure requires consideration of both the advantages and constraints of this legal form and tax status. While any decision should ideally be made in consultation with legal counsel, here are a few practical considerations that may help guide your assessment. 

Advantages of 501(c)(3) Nonprofit Status

Tax-Deductibility of Donations and Eligibility for Grants or Government Contracts 

Tax-deductibility is an important incentive for donors. Donations made to a 501(c)(3) nonprofit are generally tax-deductible for the donor, whereas donations to for-profit entities or most other types of exempt organizations are not. Similarly, many institutional funders only make grants to 501(c)(3) organizations, and 501(c)(3) status may be a prerequisite for certain government contracts. If you envision donations or grants being a significant source of funds for your organization, and the requirements of public charity status don’t unduly limit the core activities you seek to engage in to accomplish your mission (e.g., lobbying activities), then 501(c)(3) status may be beneficial for your organization. 

Exemption from Income Taxes

Generally, the income generated by a nonprofit organization from revenue-generating activities is exempt from federal income taxation if the generation of that revenue actually accomplishes the organization’s tax-exempt purposes (e.g., college tuition or hospital service fees). It’s important to understand when revenue is “substantially related” to accomplishing an exempt purpose, an evaluation that’s heavily driven by facts and circumstances, and best undertaken with advice of legal counsel. 

Public Transparency/Accountability 

Choosing the nonprofit form can signal trustworthiness, in part, because a nonprofit is legally required to operate exclusively in furtherance of the organization’s charitable purposes and is subject to regulatory scrutiny. In fact, studies have shown that nonprofits are among the most trusted institutions in the U.S. and are relied upon to shape better policies and deliver better results in local communities.² A 501(c)(3) nonprofit is subject to significant operational requirements and restrictions as well as public disclosure obligations under both state and federal laws. At the federal level, 501(c)(3) tax-exempt nonprofits must annually file Form 990 financial informational returns, which are publicly available on the IRS’s website. At the state level, most states require charitable organizations which are soliciting or otherwise conducting charitable activities in the state to register annually. Many of the state charity regulatory databases make even more information available to the public than the IRS makes available, such as organizations’ governance documents, IRS tax-exempt application, Form 990s, and audited financial statements. 

Disadvantages or Constraints of 501(c)(3) Nonprofit Status

Limits on Leveraging Commercial Market Strategies

If you want to use a more traditional market approach to accomplish a social impact objective, e.g., leveraging investor capital to expedite innovation and growth, a tax-exempt nonprofit vehicle may not be an ideal structure. However, there are creative structuring options that can involve tax-exempt entities, including joint venture or subsidiary structuring options.

Limits on Ability to Maximize Profit and Compensation

If your goals involve simultaneously maximizing profit and social impact (even if the profit generated does not benefit any insiders or investors), a tax-exempt vehicle that’s subject to numerous regulatory restrictions may limit the organization’s strategic options when trying to maximize profit, as you must simultaneously ensure that those strategic options do not require the organization to engage in activities that may jeopardize its tax-exempt status. Nonprofit 501(c)(3) organizations must also pay “reasonable compensation” for services, which may limit the organization’s ability to compete with for-profit entities for talent in certain fields. 

Limits on Founder Control

If founder control is paramount, a nonprofit may not be ideal. No individual(s) can “own” a nonprofit or its assets. A founder may be voted out of their position by the board of directors if the board does not agree with the direction of the founder. In addition, while rare, if a state attorney general (“AG”) determined that a founder was failing to uphold their fiduciary duties, the AG could petition the court to remove the founder from any leadership roles with the organization. 

Limits Based on What the IRS Considers a “Charitable” Purpose

There are a number of groups that genuinely believe that their organizational purposes are “charitable” because they provide a significant benefit to the community or the world at large. However, the IRS, which is the gatekeeper of 501(c)(3) status, does not always agree. This difference in perspective has been seen in a number of areas, ranging from farmer’s markets to open-source software initiatives to, most recently, NIL Collectives, as highlighted in tax-exempt application denials and other IRS-issued guidance. Seeking legal counsel is especially important when an organization is seeking to operate in areas where the IRS has previously scrutinized (and denied) qualification for 501(c)(3) tax-exempt status. 

In our experience we have found that a 501(c)(3) tax-exempt nonprofit corporation is a good fit for most parties seeking to establish a new charitable project, and that the benefits of nonprofit tax-exempt status outweigh the burden of the regulatory requirements and restrictions. However, given the increasingly creative approaches taken to optimize social impact through charitable initiatives, in order to best achieve your goals, before moving forward it is important to understand the fundamental structural requirements of a tax-exempt nonprofit.

1 For organizational leaders to benefit from the protections of the corporate form, they must maintain appropriate corporate formalities, including properly maintaining corporate records of meetings, and not commingling personal and organizational funds.

2 See “Trust in Civil Society,” a report prepared by Independent Sector in partnership with Edelman Data & Intelligence, published on May 19, 2022.

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Expansion of Electronic Consent

Under the N-PCL, members and directors are permitted to take action without a meeting by unanimous written consent, which consent can be either written or electronic. (See N-PCL §§ 614(a) and 708(b)) Under the previous law, electronic consent was limited to electronic mail, otherwise known as e-mail.

To keep up with emerging changes in technology, the legislation allows members and directors to act without a meeting by unanimous consent undertaken by “other electronic means” in addition to email. This means that director or member consent can also be provided through other technology methods besides e-mail, such as the use of electronic portals that facilitate the collection of votes.

Board Vacancies

Under the previous law, when a director was elected or appointed to fill a vacancy in an unexpired term, that director was only able to fill that vacancy until the organization’s next annual meeting. (See N-PCL § 705(c)) This provision was often impractical for organizations with classified boards in which board members serve for staggered, multi-year terms, and the seat of the director whose vacancy was being filled was not set to expire at the next annual meeting.

The legislation provides increased flexibility in selecting terms for replacement directors. A director elected to fill a vacancy in an unexpired term can now hold office until the end of the term that the director was elected or appointed to fill, or for a different term determined by the board which ends at an annual meeting. These changes give boards more leeway to select a different term when filling a vacancy that better aligns with the organization’s specific objectives.

Clarification to Board Quorums

Under the N-PCL, any action taken by the board of directors requires a quorum to be present at the time of the vote.  (See N-PCL § 708(d)) The amendment clarifies that directors who are present at a meeting but not at the time of a vote due to a conflict of interest or related party transaction are deemed present at the time of the vote in determining if there is a quorum.

Takeaway

These latest amendments to the N-PCL help to modernize and update the laws around not-for-profit governance structures in a positive way. New York not-for-profit organizations may want to consider updating their certificate of incorporation and/or by-laws to reflect these changes, which may help them streamline their governance procedures.

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