Washington's New Nonprofit Corporation Act: Is Your Nonprofit Ready?

Yesterday, Governor Inslee signed into law an all-new Washington Nonprofit Corporation Act (New Act). The New Act will completely replace the current Washington Nonprofit Corporation Act, which has seen only minor updates since its adoption in 1967.

Nearly all of the New Act's provisions will take effect January 1, 2022.

While the New Act makes changes to many different aspects of Washington nonprofit corporate law, it makes major, overarching changes in three areas:

• Modernization: Many provisions of the current Act are out-of-date or do not reflect currently recommended practices in nonprofit governance. The New Act modernizes those provisions.
• Charitable Assets Held by Nonprofit Corporations: The New Act adds a new set of provisions intended to protect charitable assets held by nonprofit corporations. Such assets are currently regulated under trust law in Washington, the application of which is not always straightforward in the context of nonprofit corporations.
• Membership Organizations: The New Act adds a comprehensive set of rules governing the relationship between membership nonprofits and their members, an area in which the current Act has skeletal provisions that often raise more questions than they answer.

What It Means for Existing Nonprofits

Non-Membership Organizations

Most Washington nonprofits that do not have members will not need to amend their governing documents (either articles of incorporation or bylaws) to be in compliance with the New Act when it takes effect. The New Act will nevertheless present opportunities to many nonprofits to streamline and improve their governance if they wish to do so.

Some of those opportunities are described more completely below. Nonprofits may wish to have legal counsel review their articles of incorporation and bylaws to ensure that they are compliant with the New Act and positioned well to take advantage of its improvements.

Membership Organizations

Nonprofits that have members may need to amend their documents to address new rules governing membership qualifications, powers, notices, meetings, and voting. The New Act also presents opportunities for many membership nonprofits to improve their membership structures.

Donor-Restricted Assets

The New Act's rules governing use and management of charitable assets are significantly different from those found in Washington trust law. The new rules instead conform to Washington's Uniform Prudent Management of Institutional Funds Act (UPMIFA, Chapter 24.55 RCW), which applies to all nonprofit corporations that hold charitable assets.

Nonprofits that hold assets subject to donor-imposed restrictions (such as endowments and assets subject to donor-imposed restrictions on use) should work with legal counsel to review their policies and procedures governing the use, investment, and management of those assets, to ensure compliance with the New Act.

Out-of-State Corporations

Nonprofit corporations formed outside of Washington that operate within the state will likely face little change as a result of the New Act. The rules governing registration and operation of out-of-state nonprofit corporations do not change substantially in the New Act.

Key Provisions of the Act

While the New Act contains too many new and revised provisions to describe in a single advisory, some provisions are likely to have immediate real-world effects. We list some of those key provisions below.

Electronic Notices and Meetings

The current Act has antiquated rules requiring members, directors, and officers to opt in affirmatively, in writing, before they may receive any email notices from the corporation. The New Act permits email notices by default, with an opt-out option in case a particular member, director, or officer does not want to receive them.

The New Act also clarifies that meetings of members, directors, or officers may be held either fully or partly online, unless the corporation's articles or bylaws expressly prohibit electronic participation in meetings. Online meetings may take place by videoconference, telephone, or in any other real-time medium through which participants may simultaneously understand one another. (This does not include asynchronous media such as email.)

Membership Corporations

The current Act has only skeletal provisions concerning the relationship between a nonprofit corporation and its members. The New Act includes a comprehensive set of provisions on the topic including rules governing members' rights and duties, notices to members, membership meetings, voting by members, and inspection rights. It also expressly provides for delegates of members to carry out some of the members' duties, an organizational concept that is particularly common in religious organizations.

The New Act clarifies that members generally do not have fiduciary duties to the corporation and sets out complete procedures for membership voting by ballot. Because of the incomplete nature of current law in Washington governing membership, our experience suggests that many nonprofits have bylaws that will not comply in all respects with the New Act. Membership corporations should work with legal counsel to ensure that their governing documents are consistent with the New Act.

Board of Directors

• Board Size: Organizations that are classified for federal tax purposes as Section 501(c)(3) organizations and as public charities are required under the New Act to have at least three directors on their boards. That rule is consistent with informal IRS policy regarding public charities. Section 501(c)(3) organizations that are classified as private foundations for federal tax purposes may continue to have one or two directors.
• Fiduciary Standards: The New Act clarifies that directors of charitable nonprofits have the traditional fiduciary duties of corporate directors rather than the substantially stricter duties that apply to trustees of a charity formed as a trust—and arguably to nonprofit directors as well, under some interpretations of current law. This change should reduce potential liability exposure for directors of charitable corporations and encourage service on boards. Finally, the New Act expressly allows organizations to have youth representation on their boards, subject to a number of specific conditions.

Supervision of Charitable Assets

The New Act significantly revises the rules governing how organizations must handle charitable assets, including all assets held by Section 501(c)(3) organizations. The rules introduce new procedures for managing assets subject to donor restrictions that are designed for consistency with UPMIFA.

The New Act establishes specific procedures for modifying gift restrictions, preventing charitable assets from being distributed improperly, handling charitable assets in transactions such as mergers and dissolutions, and reporting certain major changes in a charitable organization's activities or purposes. It also provides new procedural guidance to the Attorney General's office with respect to investigations of potential misuse or mishandling of charitable assets.

"Fundamental Transactions"

The New Act has all-new provisions governing so-called "fundamental transactions"—mergers, dissolutions, dispositions of assets, and other similar transactions. The new provisions are intended to guide nonprofits through the process of a fundamental transaction with more clarity, including especially how to treat charitable assets throughout the process.

The New Act also adds for the first time provisions expressly allowing corporations to "redomesticate," or change their state of incorporation, if the other state allows such transactions as well. Finally, the New Act will allow corporations to convert from for-profit to nonprofit status, or vice versa, without reincorporating if certain conditions are met and other applicable laws allow the conversion.

Transition Provisions

On the effective date of January 1, 2022, all nonprofit corporations currently governed by Chapter 24.03 RCW will automatically be subject to the New Act. Other types of nonprofit corporations governed by other chapters of Title 24 RCW, including Chapter 24.06 miscellaneous corporations, will continue to be subject to existing law.

Corporations that have assets subject to donor restrictions on use or management may elect to use and manage their gift-restricted assets under current law (including current procedures for modification under charitable trust law) during a one-year grace period, ending on January 1, 2023, but will still be subject to the New Act in all other respects on January 1, 2022.

Conclusion

The New Act is the culmination of over a decade of work by a Washington State Bar Association committee, and also reflects extensive input from stakeholders across Washington's nonprofit sector as well as Washington's nonprofit regulators. The author became the recorder for the project in 2013 and is the primary drafter of many provisions, and other DWT attorneys provided significant input.

We are uniquely positioned to advise nonprofits on all aspects of the transition, including updating governing documents for compliance and taking advantage of potential opportunities afforded by the New Act.