Washington State Passes New NPO Regulations
Washington State Passes New NPO Regulations

Rules governing nonprofits in Washington state got their first facelift in 50 years when the calendar turned to 2022.

Washington lawmakers approved legislation (S.B. 5034) last year that modernized nonprofit statutes to address virtual meetings, added regulations to protect charitable assets, updated rules around nonprofits and their members, and fundamental transactions. The changes took effect Jan. 1, 2022.

The updated statute reflects new best practices in the nonprofit sector, according to the state association Washington Nonprofits, and it provides better guidance for membership organizations, clarity regarding board governance, and more detailed procedures for record keeping, amending governing documents, mergers, and ceasing operations.

The new rules don’t come without a cost. A new charitable asset protection account fee would be $10 for nonprofits with gross revenue of less than $500,000, for a total of $20, and $50 for those with revenue of more than $500,000 for a total of $60. The charitable asset protection account funds enforcement and education programs of the attorney general and secretary of state.

There are three areas of major changes in the new act, according to David Lawson and Judith Andrews, who write about the act in the February issue of its publication, Washington State Bar News. The Nonprofit Corporations Committee of the WSBA Business Law Section served as the primary drafter of the new act, beginning its revision in 2008 and working through three complete reviews of what would ultimately become the new act before completing its work in early 2021.

The three key areas are:

  • Modernization
  • Membership organizations
  • Protecting charitable assets

Lawson is chair of the Nonprofit Corporations Committee of the WSBA Business Law Section and counsel in the Tax-Exempt Organizations Group at Davis Wright Tremaine LLP in Seattle. Andrews is of counsel with Seattle-based Apex Law Group.

Members in general do not have fiduciary duties to the nonprofit corporations they serve but directors have traditional fiduciary duties of corporate directors – rather than stricter duties that apply to trustees of a charity formed as a trust. The change should reduce potential liability exposure for directors of charitable corporations and encourage service on boards, Lawson argues.

The new act requires that three directors serve on nonprofit boards – consistent with informal IRS policy regarding public charities – where previously one director was required to be able to incorporate. Private foundations with 501(c)(3) classification can continue to have one or two directors. People younger than 18 years old are now able to serve on a board for a nonprofit under certain conditions.

The act also allows nonprofits to change their state of incorporation if the target state allows it. For-profit corporations also would be able to convert to nonprofit status — and nonprofits to convert to for-profit — without requiring reincorporation, subject to certain conditions and laws.

There are new provisions governing “fundamental transactions,” such as mergers, dissolutions and disposition of assets. They are intended to guide charities through the process with more clarity, particularly how charitable assets are treated during that process. It also provides new procedural guidance to the Attorney General’s office with respect to investigations of potential misuse or mishandling of charitable assets.

There are new procedures for managing assets subject to donor restrictions that are designed for consistency with Washington’s Uniform Prudent Management of Institutional Funds Act (UPMIFA, Chapter 24.55 RCW), which applies to all nonprofit corporations that hold charitable assets. 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 Jan. 1, 2023, but will still be subject to the new act in all other respects on Jan. 1, 2022.

New filing documents are located on the Washington Secretary of State’s website.