Is Your Organization Prepared for Washington’s New Nonprofit Corporation Act?

Posted on Nov 2, 2021 in Washington State

After 12 years of dedicated work driven by a committee of the Washington State Bar Association, the Washington State Legislature passed the Washington Nonprofit Corporation Act in 2021. The Act (RCW Chapter 24.03A) takes effect on January 1, 2022 and contains many provisions of interest to nonprofit organizations. Below is a summary of these provisions.

Board of Directors and Officers

The Act provides rules for the board of directors and officers in a few key areas. For public charities, it establishes a minimum requirement of three board members. For all nonprofit corporations, board officers must include a president, secretary, and treasurer, and the president and secretary may not be the same individual.

The law contains changes and requirements for notice of board meetings and requirements for board action without a meeting. For example, opt-in consent is no longer required for email notices of meetings.

There is a provision allowing for board members who are under 18 years of age provided they do not exceed three people or one-third of the total number of directors then in office, whichever is fewer.

Finally, the Act provides definitions of the fiduciary duty of directors and separately for officers, as well as the fiduciary duty protections in place.

Action item: Many of these changes were intended to modernize the law to accommodate electronic communications, email, etc. You should review your organization’s documents in case you need to update them to conform with the new law.

Membership

The concept of membership is often associated with business leagues and other membership associations generally focused on a specific industry, where individuals or businesses pay dues and participate in membership meetings, conferences, and other events organized by the nonprofit.

Separate from dues-paying members, organizations may have members with special rights outlined in the organization’s governing documents. This type of member is often focused on governance and major transactions of the organization. This second type of member may exist when a new nonprofit is formed by several existing nonprofits and each founding organization is named as a member in the new organization’s governing documents. Also, supporting organizations often name the supported organization as a member.

The revisions made with the new Act intend to provide definitions and structure to the concept of nonprofit members that has been lacking in both for many years. The Act defines a member for nonprofit corporation purposes and defines the rights and powers of members. The Act also provides structure around membership meetings, the notice requirements for those meetings, and a default definition of quorum. Note at least one meeting is required to be held each year, even if the organization has only one member.

Action item: Existing organizations with a category of member defined in its governing documents should verify with legal counsel if amendments must be made to conform to the new Act.

Fundamental Transactions

The Act contains new provisions governing certain major transactions, which the law calls “fundamental transactions.” Fundamental transactions include the following:

  • Amending the organization’s Articles of Incorporation and/or Bylaws
  • Merger (consolidation is no longer a separate concept)
  • Disposition of some or all of the organization’s assets in a transaction outside of the organization’s ordinary course of business
  • Dissolution, whether voluntary, administrative, or judicial
  • Domestication
  • Entity conversion

The Act provides guidance for organizations entering into any type of transaction listed above. In addition, the Act now allows for “redomestication,” meaning an organization may change its state of incorporation so long as the original state of incorporation also allows for the change. Finally, the law allows for organizations to convert from for-profit to nonprofit status provided certain provisions are satisfied. Domestication and entity conversion were not previously allowed for nonprofit organizations.

Action item: You may want to compare your organization’s governance documents to ensure consistency with the new law regarding these types of transactions.

Charitable Asset Protection and Attorney General Supervision, Additional Fees

A general theme throughout the Act is a focus on protecting charitable assets. One such area relates to restricted gifts. The law is designed to be consistent with Uniform Prudent Management of Institutional Funds Act (UPMIFA). A restricted gift is established through the existence of a gift instrument, which can be found in many forms. A written, electronic, or oral solicitation may constitute a gift instrument in some cases. The law also provides guidance on modifying gift restrictions. In addition to restricted gifts, the Act provides procedures for handling charitable assets in the event of a fundamental transaction such as a merger or a dissolution.

Reporting of major changes to an organization’s purpose or programs must occur in the organization’s annual reports with the Secretary of State, and the Attorney General has the power to supervise charitable assets with specific powers granted in the Act.

Finally, the Act creates a Charitable Asset Protection Account, funded by an additional fee on annual reports, to be used for Attorney General and Secretary of State for education and enforcement efforts. The additional fee is $10 ($20 total) for organizations with gross revenue under $500,000, and an additional $50 ($60 total) for organizations with gross revenue of $500,000 or more.

Action item: If you have any question about whether your organization creates a gift instrument, please contact your legal counsel.

If your organization identifies areas of its governing documents that may require updates to be in compliance with the new Act, it should consult with legal counsel as soon as possible to ensure those changes are made prior to year-end.

©2021 Clark Nuber PS. All rights reserved.

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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