Law forces change on some private foundations

October 24, 2008
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One of three new provisions added to the state’s Nonprofit Corporation Act this summer is having unintended consequences for private family foundations, a local lawyer said last week.

Backed by the Michigan Nonprofit Association and the state attorney general’s office, the act now requires nonprofits to report a minimum of three members on the board of directors.

Warner Norcross & Judd Partner Jeff Power called that provision “the most troublesome part of this legislation. Lots of private foundations are formed by a husband and wife. They put their money into it, they are the board, they invest it and they give it away.

“So whose business is it to become a member of the board? Nobody’s.”

Power predicted the law would chill creation of new private foundations in Michigan.

Jane Forbes, a member of Dykema Gossett and chair of the State Bar of Michigan’s Nonprofit Corporation Committee, said the committee was to meet last week and discuss proposing changes to the Legislature that could reverse the impact on private foundations, as well as broader revisions.

Forbes said the law was part of a larger movement toward more accountability and transparency in nonprofits that has been underway nationally for about five years.

Erin Skene-Pratt, senior director of public policy for the Michigan Nonprofit Association, said her organization had been working on the legislation “for a few years.” It was intended to address concerns about nonprofit operations and governance raised by elected officials and the media, she said.

“We believe that appropriate government oversight and self-regulation work to build confidence in the sector. We’re happy to work with any organizations that are feeling unintended consequences and look at how those could be addressed,” Skene-Pratt said.

Private foundations are used by high-wealth families and individuals as a charity tool. Locally, the DeVos and Van Andel families of Amway Corp. have used their family foundations to donate millions to charities across the country. Dozens more are located in Kent County, as well.

The Internal Revenue Service already requires public reporting for private foundations, and that information is often available on the Internet, Power noted. 

“There are a number of private foundations that don’t have three directors,” Forbes said. They are highly regulated organizations, so whether they have one director or 10, in my view, it doesn’t affect how well they function.”

The July amendment to the Nonprofit Corporation Act states that nonprofits in existence as of July 16 have until Jan. 16 to file the minimum of three board members with the Bureau of Commercial Services, according to a Michigan Department of Labor & Growth press release. Those formed after July 16 must have had at least three board members from the start. Some organizations may have to alter their bylaws to accommodate the new law, DLEG noted.

Included in the changes is a prohibition on nonprofits providing loans or loan guarantees to an officer or director, which Power said may impact some small, rural hospitals that use such terms as part of recruitment packages for physicians.

DLEG said annual reports that list the names and addresses of officers and directors must be filed. Nonprofits that were in existence as of Dec. 31 had an Oct. 1 deadline; those formed during 2008 have until Oct. 1, 2009.

Nonprofits that fail to file an annual report or pay the annual fee for two years will be automatically dissolved. That dissolution must be reported to the state Attorney General’s office within 60 days, and disposal of assets must have the attorney general’s permission.

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