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Changes Ahead for Kentucky's Nonprofits and Other Business Entities

Gov. Beshear signed House Bill 440 into law on April 1st, with the provisions of the new law becoming effective on June 24th. This new law adopts provisions modeled on the Revised Uniform Unincorporated Nonprofit Associations Act and makes several changes to Kentucky's business entities laws, particularly in the area of nonprofit companies. Overall, the law should strengthen opportunities for non-profits association and businesses to operate in the Commonwealth, and this post will briefly discuss some of the highlights.

The Kentucky Uniform Unincorporated Associations Act ("the Act") is a set of laws designed to assist small, informal groups and organizations with governance, liability issues, legal authority to enter into transactions or own property, and dissolve. Common examples of groups the Act is designed to benefit are Little League teams or other fundraising efforts such as band booster clubs. These groups may now file a certificate of association with the Secretary of State, conferring on them some of the benefits and protections received by other entities at more advanced in levels of organization and corporate form. This legislation is a boon to these groups, as their structure and activities often do not warrant more complex levels of organization with the attendant strictures of reporting and formality. One of the most crucial benefits of the Act is the limitation of liability as against officers and directors of the organization unless they were personally negligent or at fault. After the filing of the certificate of association, the Secretary of State will recognize the unincorporated nonprofit association as a legal entity separate and apart from its members, shielding those members from the obligations and liabilities of the organization. The filing of the certificate is a necessary step to provide the organization with these legal protections, however. Every nonprofit association without formal organization as a business entity should file for this certificate as a matter of course, regardless of how small or simple the organization may be. Once the certificate of association is filed, the real name of the association must end with "Limited" or "Ltd."[1] All of these provisions are codified in KRS Chapter 273A.

HB 440 also revised and updated provisions of Kentucky's LLC Act, focusing on nonprofit LLCs in particular. Under the changes, it is now possible for a nonprofit LLC to have no members without triggering the dissolution provisions of KRS 275.285(4).[2] Domestic and foreign nonprofit corporations may convert into a nonprofit LLC, but only when all members of the LLC are IRC §501(c)(3) or §501(c)(4) organizations themselves.[3] The nonprofit LLC may not issue membership interests in the LLC unless all members are nonprofit entities.

Non-profit LLCs weren't the only Limited Liability Companies affected by HB 440. Under changes to the LLC Act, if a member or manager of an LLC has an adverse interest to the LLC in the outcome of a derivative suit, that member's vote will be excluded from determining whether a majority of members or managers has agreed to the suit unless the operating agreement provides otherwise.[4] Members or managers of LLCs are not entitled to compensation for services performed for the LLC absent a contrary provision in the operating agreement.[5] The new law has added seven more actions that require the vote of the LLC members: (1) merge or convert the LLC or approve a sale of substantially all of its assets; (2) admit a new member, including as assignee of a member, as a member; (3) remove a member after assignment of the member's entire membership interest; (4) waive an agreement to contribute to the LLC; (5) approve voluntary dissolution; (6) approve any acting contravention of a written operating agreement; or (7) allow the voluntary resignation of a member from a manager-managed LLC.[6]

The Kentucky Nonprofit Corporation Act has been updated to reflect modern methods of communication. A new provision states that notice by electronic transmission will now be considered written notice.[7] Actions by all members of the board can be taken without a meeting, and the action becomes effective upon the signature of the last board member.[8] Electronic transmissions are now viable delivery options, and electronic signatures are now valid.[9] Finally, directors can participate in meetings by means of electronic communications such as Skype.[10] Members may be deemed present in person and vote at the meeting, provided certain conditions are met.

Many other changes to Kentucky nonprofits and other business entities are set to also go into effect on June 24th. For more information on these changes and how they will affect your entity, contact the attorneys of McBrayer.

This article is intended as a summary of state and federal law and does not constitute legal advice.

Required Disclosure under Circular 230:

Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party.

[1] KRS 365.015

[2] KRS 275.015(19)

[3] KRS 275.376(13)

[4] KRS 275.335

[5] KRS 275.165

[6] KRS 275.175(2)(d)-(j)

[7] KRS 273.162

[8] KRS 273.375

[9] KRS 273.161(17), (21)

[10] KRS 273.195

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