If you have experience in the for-profit world, you have likely heard the common advice that you should incorporate a new business in the state of Delaware. As of 2016, roughly 44% of Fortune 500 companies are incorporated in Delaware. There are several advantages when starting a for-profit entity in Delaware, so it’s natural to ask: if it benefits for-profit companies, shouldn’t it also benefit my nonprofit to incorporate in Delaware?
Some attorneys and other groups often say “yes” to that question, usually because it makes it easier for them to have to deal with a single state for all clients. In our experience working specifically in the nonprofit sector, we believe the answer is almost always going to be NO…in capital letters. But before we get into the specifics, let’s take a look at why for-profit entities prefer incorporating in Delaware.
- Flexible governance and structuring of the organizations
- Delaware does not require naming corporate officers
- Delaware does not require fees for any state government approvals (such as amendments and dissolutions)
- There is no corporate income tax from Delaware if you do business in another state
- Delaware does not have taxes on stock shares for non-Delaware residents
While the benefits above have a certain appeal to some who are planning to start a nonprofit, you have to look at the long-term life of your nonprofit entity. If your plan to start a nonprofit includes filing for 501(c)(3) status, then the flexibility of governance allowed by Delaware will not apply. The IRS does not allow public charities seeking 501(c)(3) status to have only a single director as the board. Nor does the IRS allow a majority of related board members to serve on a board of directors. Additionally, officers must be named on the Form 1023 application for 501(c)(3) status, so the privacy granted at the state level is vacant at the federal level. Though Delaware does not require an annual filing for operating and soliciting in the state, unless you truly plan to operate in Delaware, there is no advantage to their passive oversight of charities.
The real headache begins when it comes to establishing your new entity in your actual State of operations. In order to operate in a different state than your incorporated state, most state governments require nonprofits to file a Certificate of Authority. In some states, a Certificate of Authority can cost more than initial incorporation filings. Incorporating in the state in which you plan to operate bypasses this step altogether because you are not required to gain a Certificate of Authority in your incorporated state.
Earlier in this post, we mention that Delaware does not require an annual Charitable Solicitations Registration and Renewal. But, it is likely that your state of operations will have this requirement (it is currently required in 40 states, plus DC). Being incorporated in Delaware will not exempt you from having to register with another state’s Division of Charities in order to conduct your nonprofit’s activities. Whether incorporated or operating with a Certificate of Authority, states with charitable solicitations registrations will require your nonprofit to file this document in order to legally operate in that state.
Based on our experience in establishing many thousands of nonprofits, our general advice is to incorporate in the state in which you will primarily operate. If your charity will primarily perform its activities in California, incorporate in California. If operating in primarily in Florida, incorporate in Florida. Doing so will save you in the long-run when it comes to maintaining compliance in your primary state of operations. There may be outlier exceptions to this, of course. But overall, there simply is not enough benefit to incorporating in Delaware to outweigh the long-term compliance difficulties and headache that comes with meeting Delaware’s requirements in addition to your primary state.
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