During the 2021 legislative session, the Washington Legislature passed an all-new Washington Nonprofit Corporation Act (the “New Act”), which went into effect on January 1, 2022.
The New Act applies to domestic and foreign nonprofits, “public benefit” nonprofits and charitable corporations. The statutes have modernized operating practices to reflect the use of technology, increase alignment with federal requirements and commonly accepted business practices and have clarified responsibilities of fiduciaries and entities handling charitable assets.
Most notably, the New Act permits electronic communications, voting and meetings. It also allows minors under 18 to serve on a Board of Directors for a nonprofit corporation.
The New Act consists of four parts.
Part One (Formation and General Provisions): Formation and General Provisions include new requirements for membership organizations to specify classes, qualifications and termination procedures and for charitable corporations to report any “major changes” to their stated purposes, program or activities in their next annual report.
Part Two (Governance): Governance is detailed in Part Two, which includes provisions pertaining to the board, officers, directors, committees, meetings and voting. Among other changes under the New Act, a minimum of three directors are now required for charitable corporations or nonprofits claiming tax-exempt status under Section 509(a)(1-4). Additionally, unless the governing documents state otherwise, the presumptive term for a director is one year.
Part Three (Fundamental Transactions): “Fundamental Transactions” like domestication, for-profit conversion, mergers and dissolutions are addressed in Part Three. In this section, the New Act provides new procedures for nonprofits and charitable corporations in Washington to domestic as foreign – or vice versa. Additionally, it allows a nonprofit to convert to a for-profit corporation.
Part Four (Oversight): Lastly, Part Four increases the Washington Attorney General’s oversight of charitable assets and outlines their authority to supervise, investigate and impose penalties for mishandling of charitable assets.
With regard to the New Act, most nonprofits don’t have to do anything. The new law simply helps to set defaults and standards that many nonprofit organizations already have in place.
For example, if you have a corporation without members or donor-restricted assets, you probably don’t have to take any action to comply with the New Act, but you still may benefit from updating your articles and bylaws to incorporate newly permitted procedures such as virtual meetings or voting.
Most affected are “membership” organizations, tax-exempt entities under § 509(a)(1)(4) of the Internal Revenue Code or entities holding charitable assets or fundraisers. If your organization falls in any of those categories, you should revise and update your practices, articles and bylaws to ensure compliance.
If you would like to know more about how this law could affect your organization, please contact our office. We’re happy to help you navigate these changes.
The Smith + Malek Team