Can a not-for-profit childcare center at a New York State facility charge state employees and SUNY students less than the general public without losing its not-for-profit status?

Plain-English summary

Childcare centers at New York State facilities (operated by not-for-profit corporations and supported in part by the State through free space, limited maintenance, and grants) were originally established to control costs for state employees. As demand from state employees fell and demand from community families grew, the centers' volunteer boards wanted to charge community families a higher rate than state employees and SUNY students. The Governor's Office of Employee Relations asked the AG whether this dual-rate structure would jeopardize the not-for-profit status of the centers under the New York Not-For-Profit Corporation Law.

The AG concluded it would not. The opinion limited itself to N-PCL analysis (not federal tax-exempt status, licensing, or certification). Under N-PCL § 202(a)(16), a not-for-profit has all powers necessary to effect its corporate purposes. Under § 508, a not-for-profit may charge fees and receive income for services, and may even make "incidental profit," as long as the profit is applied to the corporation's lawful activities and not distributed among members, directors, or officers. N-PCL § 204 prohibits activities for pecuniary profit or financial gain unless they support the corporation's lawful activities. None of these provisions prohibits differential pricing.

Boodram v. NYU Downtown Hospital made the point directly: that an entity generates a profit and uses it to support its mission does not breach not-for-profit status. The First Department's decision contrasted that situation with Salem Social Club, where the entity's secretary-treasurer pocketed the profits. The line is between using surplus to fund the mission (permitted) and distributing surplus to insiders (prohibited).

The AG predicated its conclusion on three factual assumptions the Committee should verify: that each center's articles and bylaws did not prohibit dual rates, that profits were used to support the center's charitable purposes, and that no profits were distributed to any member, director, or officer.

Currency note

This opinion was issued in 2002. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: What did the opinion deliberately not address?
A: Federal tax-exempt status (IRS 501(c)(3)), childcare licensing or certification under Article 47 of the Social Services Law, and any other regulatory regime outside the N-PCL. Differential pricing could still raise concerns under those frameworks; the opinion stopped at New York not-for-profit corporate law.

Q: What is the line between "incidental profit" and impermissible profit?
A: Under N-PCL § 508, profit is incidental if it arises out of the corporation's lawful activities and is reinvested in those activities. It becomes impermissible if it is distributed to members, directors, or officers (the non-distribution constraint). Salem Social Club exemplifies the impermissible side.

Q: Could a not-for-profit run a profit-making activity unrelated to its mission?
A: Kemp's Bus Service held yes, as long as profits go back into the corporation's lawful charitable purposes. The N-PCL does not categorically bar profitable activities outside the corporation's stated mission, only profitable activities that benefit insiders.

Q: Why didn't the dual rate structure violate § 204?
A: Section 204 prohibits activities for "pecuniary profit or financial gain" except to the extent that the activity supports the corporation's other lawful activities. Dual rates increased the center's overall revenue but the increased revenue was directed back into providing childcare, which is the corporation's lawful activity. The AG saw no conflict.

Q: Could a board of directors lawfully decide what the differential should be?
A: Yes, in the AG's view, as long as the certificate of incorporation and bylaws don't say otherwise. Boards of not-for-profit childcare centers routinely set rate structures.

Background and statutory framework

The New York Not-For-Profit Corporation Law sets the framework for non-stock corporations organized for purposes other than pecuniary profit. Three provisions matter for this opinion. Section 202(a)(16) gives broad powers to effectuate corporate purposes. Section 204 prohibits pecuniary-profit activities except as they support lawful activities. Section 508 explicitly authorizes fees and prices for services, allows incidental profit, and forbids distribution of profits to insiders.

The Boodram decision from the First Department applied these provisions to a hospital, noting that profitability does not by itself violate § 508 absent insider distribution. Salem Social Club gave the other side: where the secretary-treasurer realized profit "from the activity for which the purported club was formed," § 508 was violated.

The state-facility childcare centers operate under labor-management initiatives, are subject to various regulatory schemes (childcare licensing, SUNY campus regulations, etc.), and receive in-kind support and limited grants from the State. None of that changes the N-PCL analysis but is relevant to the other regulatory regimes the AG declined to address.

Citations and references

Statutes:

• Not-For-Profit Corporation Law § 202(a)(16) (powers in furtherance of corporate purposes)
• Not-For-Profit Corporation Law § 204 (prohibition on pecuniary profit activities except as supporting lawful activities)
• Not-For-Profit Corporation Law § 508 (fees and incidental profit; non-distribution constraint)

Cases:

• Boodram v. NYU Downtown Hosp., 2002 N.Y. App. Div. LEXIS 903 (1st Dep't 2002) (profit does not breach status absent insider distribution)
• New York State Liquor Authority v. Salem Social Club, Inc., 76 A.D.2d 908 (2d Dep't 1980) (secretary-treasurer pocketed profits, § 508 violation)
• Kemp's Bus Service, Inc. v. Livingston-Wyoming Chapter of NYSARC, Inc., 267 A.D.2d 1085 (4th Dep't 1999) (profitable activity unrelated to mission permitted if profits used for charitable purposes)

Source

• Landing page: https://ag.ny.gov/libraries-documents/opinions/opinions-year
• Original PDF: https://ag.ny.gov/sites/default/files/opinions/2002-F1_pw.pdf

Original opinion text

Opn. No. 2002-F1
NOT-FOR-PROFIT CORPORATION LAW §§ 202(a)(16), 204, 508.

Charging dual rates will not jeopardize the not-for-profit status of childcare centers located at New York State facilities under the New York Not-For-Profit Corporation Law. Our conclusion is limited to the application of the New York Not-For-Profit Corporation Law. This opinion does not address the possible ramifications of charging dual rates under other laws or regulations.

March 27, 2002

Walter J. Pellegrini, Esq.
Counsel
State of New York Governor's Office of Employee Relations
2 Empire State Plaza, 12th Floor
Albany, New York 12223-1250

Informal Opinion
No. 2002-F1

Dear Mr. Pellegrini:

You have requested an opinion on behalf of the Family Benefits Labor-Management Committee (Committee) regarding whether childcare centers located at New York State facilities may retain their not-for-profit status if they charge the general public more than State employees and SUNY students. The Governor's Office of Employee Relations (OER) has a direct interest in this matter because the not-for-profit childcare centers were established to control costs for State employees. We conclude that charging dual rates will not jeopardize the not-for-profit status of the childcare centers under the New York Not-For-Profit Corporation Law. Our conclusion is limited to the application of the New York Not-For-Profit Corporation Law. This opinion does not address the possible ramifications of charging dual rates under other laws or regulations. For example, we did not analyze whether charging dual rates would jeopardize (i) the tax-exempt status of the childcare centers under federal law or (ii) the licensing or certification of the centers as childcare centers.

As you describe the childcare centers, they are all not-for-profit corporations that were established as part of a labor-management initiative to provide childcare for New York State employees and the general public on a space-available basis. The centers are required to give priority to children of State employees. The State provides free space, limited cleaning and maintenance and some technical assistance and training for the centers' employees. Some centers also receive limited funding from Health and Safety Grants and Training Grants that are awarded by OER. Centers on SUNY campuses give priority to the children of State employees and the children of SUNY students. These campus childcare centers also receive operating funds from SUNY through an annual legislative appropriation.

The volunteer Board of Directors at each center determines the childcare rates to be charged at that center. Some charge a flat rate; some have sliding fee scales based on gross income of the user. As the average age of the State work force has increased, the employee demand for services has diminished somewhat and some centers are providing significantly more care for community children than they once did. The centers would like to establish a dual fee scale as a way of recognizing the current level of State support for the centers. The lower rate would apply to the children of State employees and, at the SUNY childcare centers, to the children of SUNY students; the higher rate would apply to the children of local community families.

New York law appears to permit such an arrangement. Section 202(a)(16) of the New York Not-For-Profit Corporation Law (N-PCL) provides in pertinent part that a not-for-profit corporation "shall have power in furtherance of its corporate purposes . . . [t]o have and exercise all powers necessary to effect any or all of the purposes for which the corporation is formed." More specifically, N-PCL § 508 grants a not-for-profit corporation the authority to charge fees and receive income for its services, but this provision also requires that any profits be used solely to support the lawful activities of the corporation:

A corporation whose lawful activities involve among other things the charging of fees or prices for its services or products shall have the right to receive such income and, in so doing, may make an incidental profit. All such incidental profits shall be applied to the maintenance, expansion or operation of the lawful activities of the corporation, and in no case shall be divided or distributed in any manner whatsoever among the members, directors or officers of the corporation.

N-PCL § 204 similarly limits a not-for-profit corporation's authority by prohibiting "activities for pecuniary profit or financial gain, whether or not in furtherance of its corporate purposes, except to the extent that such activity supports its other lawful activities then being conducted." There is, however, no statutory prohibition of or limitation in the N-PCL on a not-for-profit corporation's ability, when it is receiving income, to charge different fees to different users of its services.

Nor have we identified any such prohibition or limitation in the relevant case law. Precedent indicates that as long as the incidental profit resulting from the operation of the lawful activities of a not-for-profit corporation is used to support the operation of the corporation's lawful activities and not distributed among its members, directors or officers, nothing in the N-PCL prevents that profit from being generated by charging dual rates to different groups of users. Compare Boodram v. NYU Downtown Hosp., 2002 N.Y. App. Div. LEXIS 903 (1st Dep't 2002) ("[i]t makes no difference that the accommodations generate a profit for defendant and no evidence is adduced to support plaintiff's bare speculation that profits are being used for the personal use of defendant's directors and officers") with New York State Liquor Authority v. Salem Social Club, Inc., 76 A.D.2d 908, 909 (2d Dep't 1980) (where the secretary-treasurer of an alleged not-for-profit social club realized a profit "from the activity for which the purported club was formed," the profit was found to violate N-PCL § 508).

We thus conclude that charging dual rates will not jeopardize the not-for-profit status of the centers under the New York Not-For-Profit Corporation Law. Our conclusion is based on the factual assumptions, which should be verified by the Committee, that (i) each center's certificate of incorporation and bylaws do not prohibit charging dual rates, (ii) any profits are used solely to support the charitable purposes of the center, and (iii) no profits from charging fees for its childcare services will be distributed to any member, director or officer of such center.

Very truly yours,

ELIOT SPITZER
Attorney General

Footnote: The provision of childcare services is within the centers' corporate purposes. We note that at least one court has held that the N-PCL does not prohibit a not-for-profit corporation from engaging even in activities for profit or financial gain that are not in furtherance of its corporate purposes. See Kemp's Bus Service, Inc. v. Livingston-Wyoming Chapter of NYSARC, Inc., 267 A.D.2d 1085 (4th Dep't 1999) (not-for-profit corporation permitted to run a commercial transportation service unrelated to its charitable mission because it used profits from the service to support its lawful charitable purposes).