BUSINESS ENTITIES (NOT-FOR-PROFIT)

Business Entities (Not-For-Profit Corporations)

In New York, churches must incorporate under the Religious Corporations Law (RCO).

In New York, museums, schools and historical societies must generally incorporate under the Education Law (EDN).

In New York, other organizations that intend to operate as not-for-profit businesses (also known as "nonprofits") must incorporate under the Not-for-Profit Corporation Law (NPC).

New York not-for-profit corporations may also apply to the Internal Revenue Service (IRS) for a determination that they qualify as tax-exempt organizations, such as those specified in the Internal Revenue Code (IRC) Sections 501(c)(3) – 501(c)(29) and IRC Section 527.

IRC Section 501(c)(3) allows tax-exempt status for corporations, limited liability corporations (LLCs), trusts and unincorporated associations formed for amateur sports competition (providing that no athletic facilities or equipment is provided), charitable, educational, literary, religious, prevention of cruelty to animals or children, scientific and public safety testing purposes, as long as no part of any such entity's net earnings inures to the benefit of any private shareholder or individual.

IRC Section 501(c)(4) allows tax-exempt status for civic leagues or organizations not organized for profit, but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes, as long as no part of any such entity's net earnings inures to the benefit of any private shareholder or individual.

IRC Section 501(c)(5) allows tax-exempt status for agricultural, labor or horticultural organizations.

IRC Section 501(c)(6) allows tax-exempt status for boards of trade, business leagues, chambers of commerce, real-estate boards or professional football leagues (whether or not administering a pension fund for football players), not organized for profit, as long as no part of any such entity's net earnings inures to the benefit of any private shareholder or individual.

IRC Section 501(c)(7) allows tax-exempt status for clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes, as long as no part of any such entity's net earnings inures to the benefit of any private shareholder or individual.

IRC Section 501(c)(8) allows tax-exempt status for fraternal beneficiary associations, orders or societies.

IRC Section 501(c)(9) allows tax-exempt status for voluntary employees’ beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or designated beneficiaries, as long as no part of any such entity's net earnings inures to the benefit of any private shareholder or individual.

IRC Section 501(c)(10) allows tax-exempt status for domestic fraternal associations, orders or societies, operating under the lodge system.

IRC Section 501(c)(11) allows tax-exempt status for

IRC Section 501(c)(12) allows tax-exempt status for benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations, but only if 85% or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses.

IRC Section 501(c)(13) allows tax-exempt status for cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit, and any corporation chartered solely for the purpose of the disposal of bodies by burial or cremation which is not permitted by its charter to engage in any business not necessarily incident to that purpose, as long as no part of any such entity's net earnings inures to the benefit of any private shareholder or individual.

IRC Section 501(c)(14) allows tax-exempt status for credit unions without capital stock organized and operated for mutual purposes and without profit.

IRC Section 501(c)(15) allows tax-exempt status for insurance companies – as defined in IRC Section 816(a) – other than life (including interinsurers and reciprocal underwriters), providing that the gross receipts for the taxable year do not exceed $600,000, and more than 50% of such gross receipts consist of premiums.

IRC Section 501(c)(16) allows tax-exempt status for corporations organized by an association that is subject to certain credits against tax or members thereof, for the purpose of financing the ordinary crop operations of such members or other producers, and operated in conjunction with such association.

IRC Section 501(c)(17) allows tax-exempt status for certain trusts forming part of a plan providing for the payment of supplemental unemployment compensation benefits.

IRC Section 501(c)(18) allows tax-exempt status for certain trusts

IRC Section 501(c)(19) allows tax-exempt status for certain posts

IRC Section 501(c)(21) allows tax-exempt status for certain

IRC Section 501(c)(22) allows tax-exempt status for certain trusts

IRC Section 501(c)(23) allows tax-exempt status for any association organized before 1880 more than 75% of the members of which are present or past members of the Armed Forces and a principal purpose of which is to provide insurance and other benefits to veterans or their dependents.

IRC Section 501(c)(24) allows tax-exempt status for a trust described in Employee Retirement Income Security Act of 1974 (ERISA) Section 4049, in effect on the date of the enactment of the Single-Employer Pension Plan Amendments Act of 1986 (SEPPAA).

IRC Section 501(c)(25) allows tax-exempt status for any corporation or trust which has no more than 35 shareholders or beneficiaries, has only one class of stock or beneficial interest, and is organized for the exclusive purposes of acquiring real property and holding title to, and collecting income from, such property, and then remitting the entire amount of income from such property (less expenses) to one or more specified organizations which are shareholders of such corporation or beneficiaries of such trust.

IRC Section 501(c)(26) allows tax-exempt status for any membership organization established by a State exclusively to provide coverage for medical care – as defined in IRC Section 213(d) – on a not-for-profit basis to certain specified classes of individuals through insurance issued by the organization, or a health maintenance organization under an arrangement with such organization.

IRC Section 501(c)(27) allows tax-exempt status for any membership organization, if such organization was established before June 1, 1996, by a state exclusively to reimburse its members for losses arising under workmen’s compensation acts, and such state also requires that the membership of such organization consist of all the entities which issue insurance covering workmen’s compensation losses in such state, and all persons and governmental entities who self-insure against such losses, and such organization operates as a not-for-profit organization by returning surplus income to its members or workmen’s compensation policyholders on a periodic basis, and reducing initial premiums in anticipation of investment income.

IRC Section 501(c)(28) allows tax-exempt status for the National Railroad Retirement Investment Trust established under section 15(j) of the Railroad Retirement Act of 1974 (RRA).

IRC Section 501(c)(29) allows tax-exempt status for certain health nonprofit insurers within the meaning of the Patient Protection and Affordable Care Act (PPACA, a/k/a “Obamacare”), which have received a loan or grant under the Consumer Operated and Oriented Plan (CO–OP) program under such Section 1322 thereof, but only with respect to the periods during which the issuer was in compliance with the requirements of such section and any agreement with respect to such loan or grant.

IRC Section 527 allows tax-exempt status for political organizations for the purpose of any law which refers to organizations exempt from income taxes.

Under NPC Article 7, not-for-profit corporations must have at least 3 directors, education corporations must have 5 - 25 trustees, and number of trustees for religious corporations varies by type.

Under various Sections in various NPC Articles, certain responsibilities of the Board cannot be delegated, but must be performed only by the full Board or Committees thereof, such as a transaction disposing of substantially all assets under NPC Section 510(a)(1) – and if the corporation has members, member approval also is required, changing the number of directors under NPC Section 702(b)(1), removal of a director from office under NPC Section 706(a), various housekeeping tasks (such as amendment or repeal of bylaws or adoption of new bylaws, amendment or repeal of any board resolution that, by its terms, can be amended or repealed only by the full Board) under NPC Section 712(a), amendment of the certificate of incorporation under NPC Section 802(a)(2), a plan for merger or consolidation under NPC Section 903(a), a plan for dissolution and distribution of assets under NPC Section 1002(a), filling of board or committee vacancies, or fixing of Directors’ compensation.

NPC Section 717(a) requires Directors of a not-for-profit corporation are required to discharge their duties in good faith, with the degree of diligence, care and skill that an ordinarily-prudent person would exercise under similar circumstances in a similar position.

Under the NY Non-profit Revitalization Act (which has effected modifications and improvements to the original NPC over the years), all New York not-for-profit corporations are required to have a conflict of interest policy in place, and are prohibited from entering into “related party transactions” unless the Board determines that each such transaction is fair, reasonable and in the best interest of the not-for-profit corporation, and if such not-for-profit corporation has more than 20 employees and generates more than $1M in revenue, such not-for-profit corporation must also have a whistleblower policy.

In general, the NPC prohibits any form of self-dealing or favoritism.

The NPC makes Directors responsible to the not-for-profit corporation itself, the constituency served by such not-for-profit corporation, the public at large, and to New York State itself.

Under NPC Section 720-A, a volunteer (uncompensated) officer or director of an IRC Section 501(c)(3) organization is not liable to any person based solely on his or her conduct in the execution of his or her office unless his or her conduct constituted gross negligence or was intended to cause the resulting harm, but regardless of such Section, a director or officer may still be liable in an action brought by the corporation itself, derivative actions brought in the name of the corporation, or actions for grossly negligent or intentional acts.

Typical corporate tasks, such as drafting and filing articles of incorporation, corporate by-laws, registration to solicit funds, advice on tax-related laws affecting nonprofits, management of all the legal requirements under the IRS code 501(c)(3) for trusts, foundations, and not-for-profit corporations.

Expediting registration in the New York Charities Bureau (an agency within the New York State Attorney General’s Office), since certain not-for-profit organizations are required to register with the Charities Bureau.

Legal support regarding tax exemptions, IRS audits, New York State excise, sales and real property tax exemptions.

Reporting corporate information to the IRS as required, and legal support for preparing IRS Form 990.

Interactions with the New York State Charities Bureau, as required.

Consultation regarding ethical issues such as anti-kickbacks, conflicts of interest, corrupt practices, lobbying, self-dealing and solicitations.

Consultation regarding Board operations, such as adoption of board policies (for example, on acquisitions, conflicts of interest, divestitures, ethics, gifts, mergers, records retention, whistleblowing), director responsibilities and liabilities, governance, directors’ and officers’ (D&O) insurance, interactions with staff.

Legal support for joint ventures with other not-for-profits or with for-profits, including drafting and negotiating service-sharing arrangements (such as for a group of not-for-profits and health care projects, between not-for-profit and for-profit providers).

Corporate restructuring, including acquisitions, affiliates, divestitures, dissolutions, mergers and subsidiaries.

Legal support for approvals for asset sales, dissolutions, mergers, real estate sales from New York State entities, such as the New York State Attorney General, and the New York State Supreme Court.

Drafting and negotiating various ancillary agreements, such as for confidentiality, executive employment, leases, and service providers.

Support for endowments, pledge agreements, and planned-giving vehicles, including their creation and maintenance.

Consultation about fiscal sponsorship arrangements and related fiscal sponsorship agreements and operational requirements.

Research, analysis and reporting to senior management about United States (US) laws affecting foreign charities, including issues involving US “friends” organizations to support foreign charities, US withholding rules affecting foreign charities with US-originated investment income, and grants from US private foundations to foreign charities.

Labor and employment law issues, including human resources issues, such as dispute resolution, employee benefits, executive compensation and employment,litigation, and managing employees and union relations.

Litigation involving dissident directors, officers or members, governance issues and property ownership.

Health law issues involving ambulatory surgery centers, behavioral health providers, clinics, home health agencies, hospices, hospitals, nursing homes, on issues such as compliance, reimbursement, and regulatorymatters.

Reporting to senior management regarding government directives, legislative updates and regulations affecting nonprofits.

Consultation for educational institutions, such as colleges, schools, universities and their respective foundations and related organizations regarding affinity and sponsorship agreements, alumni associations, faculty-student associations, financing, student housing projects, taxes and other issues.

Intellectual property issues, including copyright, licenses, patent, trade secrets, trademarks and unfair competition.

Familiarity with Federal and New York State laws regarding civil society organizations (CSOs), intergovernmental organizations (IGOs), non-governmental organizations (NGOs), not-for-profit entities and tax-exempt organizations.

Consultation regarding nonprofit legal matters such as, corporate governance, corporate law, cross-border transactions, formation of nonprofit legal entities (such as charitable trusts, corporations and unincorporated associations), government affairs, international relations, operations, public-private partnerships, tax law.

Consultation regarding entity formation procedures, and the relative advantages and disadvantages of a Delaware Nonprofit Nonstock Corporation, a New York Not-for-Profit Corporation and a New York Religious Corporation.

Corporate Secretarial tasks, such as preparation of a not-for-profit bylaws, charter, constitution, corporate policies (such as Board structure, conflict of interest, fiduciary duties, records retention and whistleblower), and filing of such documents with the appropriate government authority to formally establish the entity, obtaining an employment identification number (EIN) and tax identification number (TIN), preparation, review and dissemination of consents, minutes, notices, records, resolutions and waivers, support the Corporate Secretary regarding secretarial duties.

Legal support for the preparation of federal tax-exemption recognition requests including IRS Forms 1023, 1023-EZ, 1024 and 1024-A, preparation of state franchise tax, sales tax, property tax, and other tax exemption requests as appropriate.

Consultation regarding the establishment of affiliated chapters.

Ensured that not-for-profit bylaws, charter and constitution met Federal and New York State requirements.

Consultation and general guidance regarding on permissible and prohibited activities of a not-for-profit, to avoid violations of IRC Section 501(c)3 tax-exempt status.

Management of the charitable registration process for 501(c)(3) and 501(c)(4) organizations in New York, which requires charitable registration in order to solicit charitable contributions.

Compliance with Federal and New York State non-profit, 501(c)(3) and tax-exempt law regarding advocacy and lobbying, charitable solicitation, charitable fundraising, conflict of interest management, donor-advised funds, executive compensation, excess benefit transactions, for-profit activities, for-profit and nonprofit subsidiaries, fiscal sponsorship, government relations, grantmaking, political activities, private inurement, public support requirements of public charities, public-private partnerships, unrelated business income tax (UBIT).

Drafting and negotiation of contracts and memoranda of understanding (MOUs) with domestic and international organizations, foreign governmental entities, and international and intergovernmental organizations.

Research and reporting to senior management about international treaties, such as the United Nations Convention on the Enforcement of Foreign Arbitral Awards and the Convention on the International Sale of Goods.

Consultation regarding international economic sanctions administered by the Office of Foreign Assets Control (OFAC) of the US Department of Treasury (DOT) and US export controls, in relation to nonprofit activities.

Compliance with the Foreign Corrupt Practices Act.

Consultation regarding equivalency determinations and expenditure responsibility with respect to international grantmaking by private foundations and donor-advised funds.

Legal support for intellectual property issues, such as evaluation of the risks related to the use of intellectual property, preservation of intellectual property, registration of copyright and trademarks, support for the enforcement of intellectual property rights, trade secrets.

Research and reporting to senior management about international intellectual property treaties, including the Berne Convention for the Protection of Literary and Artistic Works, and the Paris Convention on the Protection of Industrial Property.

Drafting and negotiation of intellectual property assignment and transfer agreements.

Consultation regarding acquisitions, dissolutions, divestitures and mergers of not-for-profit organizations, including the special rules for dissolution and transfers of certain assets under the New York Not-for-Profit Corporation Law and the New York Religious Corporation Law.

Consultations regarding affiliates, such as compliance with obligations arising out of affiliations, consultative status, observer status and other affiliations with international (intergovernmental) organizations.

New York is one of , and those intending to solicit on their behalf, in order to solicit contributions, whether they are a New York entity or based out-of-state.

Under the New York Executive Law (EXC) Article 7-A, entities that wish to solicit funds must register with the New York Charities Bureau, and agency of the New York State Attorney General’s Office.

Any not-for-profit entity that may be eligible for tax exemption must file with the New York Charities Bureau the Registration Statement for Charitable Organizations, including Schedule E – Request for Registration Exemption.

Under the New York Estates, Powers, and Trusts Law (EPT), any organization that holds money or owns property in New York may also have to register.

New York, California and Florida require organizations to file copies of IRS Form 990, 990-EZ, or 990PF and 990-T, with the Form 990 Schedule B attachments, which list names and addresses of contributors who gave over $5,000.

New York is also one of the 32 states that allow registrants to use either the Unified Registration Statement (URS) or the state registration form.

Seven of the 32 states the require registration do not accept URS filings, and New York does not accept URS filing for the annual financial reports (including for the form CHAR500, Annual Filing for Charitable Organization, or Form 500-C Combined Annual Financial Report).

All not-for-profits operating in New York must include a disclosure statement on every communication and solicitation.

In New York, to create a 501(c)(3) Federal tax-exempt organization, it is first necessary to form a New York not-for-profit corporation pursuant to the New York Not-For-Profit Law – NPC, and then apply for 501(c)(3) tax-exempt status from the IRS, and file the appropriate forms with the New York State Department of Taxation and Finance.

The basic steps to form a New York not-for profit corporation are as follows: choose the initial directors (at least 3) and officers; choose suchnot-for profit corporation’s name; appoint a registered agent for service of process; prepare certificate of incorporation – since the ultimate object is to achieve tax-exempt status such certificate of incorporation should include a statement of purpose that meets IRS requirements and will not engage in activities unrelated to its exempt purposes or in prohibited political or legislative, whether the corporation was created for charitable purposes or not, and any other provisions regarding the regulation of the not-for-profit's internal affairs, and a dissolution clause dedicating the corporation's assets to another 501(c)(3) organization or to the government upon dissolution (sample language can be found in Part II of IRS Form 1023-EZ); prepare the bylaws; file all required documentation with the New York Secretary of State and obtain approval for the not-for-profit; hold the first meeting of the Board, in which the Directors should formally approve the bylaws, approve the chosen officers, establish a fiscal year and accounting period, and approving initial transactions of the corporation, such as the opening of a corporate bank account; obtain a Federal employer identification number (EIN); obtain any applicable local and state business licenses or permits, depending on what activities the not-for-profit intends to perform; file the Biennial Statement on the online site; obtain the 501(c)(3) Federal tax-exempt status by filing the IRS Form 1023 or 1023-EZ, as appropriate, with the IRS; obtain New York tax-exempt status by filing Form CT-247 (for exemption from New York corporation franchise taxes) and Form 25-119.2 (for exemption from New York state and local sales taxes) with the New York State Department of Taxation and Finance.

At a minimum, the bylaws of a New York not-for-profit entity should have basic information about such entity, and the rules that will govern the Board of Directors, including: the official name of such not-for-profit entity; such not-for-profit’s principal address (meaning the location at which the corporate records will be kept); such not-for-profit’s purpose; outline of the board structure (minimum and maximum number of directors – generally at 3 directors are required); a list of the chosen officers (generally a minimum of the president, secretary, and treasurer) with a description of the duties for each;a description of the procedure for adding and removing Board members (including qualifications to serve on the Board); any term limits for Board members; the proposed schedule for regular and annual Board meetings; details on giving notice of Board meetings (such as, how many days before the meeting and method of communication); the rule on requirements (meaning how many Board members must be present to make a decision); a list and description of Board committees (smaller groups within the Board to address specific issues such as fundraising or operations); the date that will be the end of the fiscal year (the last month of such not-for-profit’s budgeting cycle); the rules for amendments (how the bylaws can be amended); a conflict of interest corporate policy (and also, depending on the projected size and revenue of such not-for-profit, a whistleblower corporate policy); a corporate policy allowing filed by the not-for-profit; a corporate policy forbidding the not-for-profit from engaging in any lobbying or political activities; a records retention corporate policy; the compensation schedule for the directors and officers (which must be “reasonable”, when compared to similarly-situated not-for-profit entities); and, how such not-for-profit will handle the dissolution of such not-for-profit (when and how to close the nonprofit).

The bylaws should be updated regularly to keep them relevant, particularly when the not-for-profit undergoes any changes or modifications.

Pursuant to the New York Section 552(b), New York requires that each person responsible for managing and investing an institutional fund shall manage and invest such fund in good faith and with the standard of fiduciary care that an ordinarily-prudent person in a like position would exercise under similar circumstances.

Under Section 552(e), an investment manager must consider the 8 specific factors (unless the terms of a gift require other considerations), when making investment decisions about an institutional fund: the general economic conditions; the possible effect of inflation or deflation; the expected tax consequences, if any, of investment decisions or strategies; the role that each investment or course of action plays within the overall investment portfolio of the fund; the expected total return from income and the appreciation of investments; other resources of the institution; the needs of the institution and the fund to make distributions and to preserve capital; and, an asset’s special relationship or special value, if any, to the purposes of the institution.

The New York Attorney General has issued guidance (but not mandatory requirements) that 2 other factors should be considered by the investment manager: processes for reviewing investment policies and strategies; and, the presence or absence of proxy voting.

NYPMIFA requires each institution, whether or not it holds endowment funds, to adopt a written investment policy setting forth guidelines on investments and the delegation of management and investment functions in accordance with NYPMIFA standards.

NYPMIFA does not address the substantial body of case law in New York that established the “business judgment rule”, under which, decisions made by the directors, committee members, and officers of not-for-profit corporations will be presumed prudent if the directors, officers, or committee members making such decisions were not conflicted in any way, acted on an informed basis, in good faith, and in the belief that the action was in the best interests of the corporation, and so, if there is evidence of the “business judgment rule” for investment decisions made by the appropriate managers of a not-for-profit corporation, New York courts will generally decline to second-guess such decisions, even if such decisions resulted in substantial losses.

Last updated 201008_1738