ArticlePrior to 2019, a New York not-for-profit membership corporation was permitted to have a single individual member. It was, thus, common for small not-for-profits to create a membership structure under which the member(s) maintained certain voting rights. This structure provided the nonprofit with an internal system of checks and balances to ensure that any action taken by the Board of Directors would be in the best interest of the entity’s charitable purpose.
In July 2019, however, a new law went into effect increasing the minimum number of members required from one to three: New York N-PCL Section 601. The law is aimed at preventing abuse by individuals seeking to further their own interests through actions of the not-for-profits of which they were members. The law applies to both new and existing membership corporations. When the law was changed, many not-for-profits amended their bylaws and made the necessary changes to either increase the number of members from one to three or remove the membership structure entirely. Unfortunately, many others still have not.
It is always important for current members and directors of nonprofits to do periodic reviews of the corporation’s by-laws and organizing documents in order to ensure compliance with current law. Outdated by-laws and certificates of incorporation become a pressing issue that creates complexity and may cause delays when not-for-profits seek to take certain actions, such as mergers, sales of property, or dissolutions.
Thank you to Colleen Spain for this week’s Tax Tracker post.