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The More (Members) the Merrier? Or, So Long, Sole Members

The New York Assembly and Senate recently passed legislation – A.B. 10336-A (Paulin) / S.B. 8699 (Gallivan) (the “Bill”) – that would raise the minimum number of members of a not-for-profit membership corporation to three through amendment of Section 601(a) of the New York Not-for-Profit Corporation Law (the “NPCL”), which currently permits a minimum of one member. The Bill would provide an exception for membership corporations with a sole member that is a corporation, joint-stock association, unincorporated association or partnership, but only if that sole member is “owned or controlled” by at least three persons.

If the Bill becomes law, it would go into effect on July 1, 2019, and would apply to both new and existing membership corporations.  It would not apply to corporations that do not have members (non-membership corporations).

The legislature’s stated rationale for the Bill is that the change will preclude the possibility that a charitable nonprofit be controlled by any one member, which will prevent abuse by an individual who may try to use a charitable nonprofit for his or her own private interest. The issue the Assembly and Senate identified is that “current law does not prevent one sole member of a charitable nonprofit from electing a board of directors.  This is a significant loophole.”

The Bill leaves the New York exempt organization community with a number of questions, both definitional and substantive, and significant issues.  It is not clear how the Bill will address the concerns identified by the Senate and the Assembly. In addition, the Bill will potentially upend an important, not atypical governance structure that is (i) widely used for a variety of valid reasons (including in many cases by private foundations), (ii) permissible and not considered a loophole or an abusive structure in many jurisdictions across the country, and (iii) accepted by the IRS, a regulator similarly concerned with private benefit. Practically speaking, the Bill would require many institutions to re-think and restructure their governance, amend their governing documents and, perhaps most challenging, identify additional members.

The Bill will next be sent to the Governor’s office for his action, which must occur before the end of the year. While the legislature is in session, the Governor has ten  days (excluding Sundays) to sign or veto the Bill. If he fails to take an action within the 10-day period, then the Bill automatically becomes law.

We will continue to update this space with information regarding any new developments on this and other aspects of New York legislation.