Q&A #32 – Should I incorporate my nonprofit in Delaware?
Question: I am in the process of forming a nonprofit corporation, and I have been told that Delaware is the best place to incorporate. Is this true? If not, which state should I choose to incorporate in?
Answer: It is a very common assumption that all corporations should be formed in Delaware. However, Delaware’s reputation as being the ideal state of incorporation comes from the world of for-profit corporations and has little relevance to nonprofits. Delaware holds no particular advantages for nonprofit corporations, so my rule of thumb is that you should generally incorporate where you foresee the organization carrying out most of its programs and activities, except in special circumstances.
The main reason so many for-profit (stock) corporations are incorporated in Delaware is because Delaware’s laws governing these types of corporations are very highly developed. The statutes are updated frequently, and there are many decades of case law addressing all varieties of legal questions involving how for-profit corporations operate. Business owners, and particularly investors, find comfort in this, and Delaware has become the preferred state of incorporation for for-profit corporations as a result.
For nonprofit (sometimes called “non-stock”) corporations, Delaware is not particularly better or worse than most other states. If your organization will be carrying out most of its programs in, for example, D.C. or Pennsylvania, there are not really compelling advantages to file Articles of Incorporation in Delaware.
In fact, by doing so you are adding an additional set of annual state filings to your future to-do list. You are generally required to file annual corporation reports in the state of incorporation as well as “foreign corporation” reports in the state(s) where your organization is operating. You also need to maintain a “registered agent” in each of these states (basically, a point of contact designated to receive service of process if the organization is sued and/or receive communications from the government). You may also need to file annual charitable solicitation registrations and comply with any state tax reporting requirements in the state(s) where your organization is operating.
Most states have good (or at least adequate) nonprofit corporation statutes, so you might as well simplify your compliance burdens by limiting the number of states involved. For this reason, I generally start with the presumption that organizations should incorporate where they will be operating, and only consider other states if there are special circumstances.
Planning Tip – One surprising hurdle in the nonprofit formation process is deciding on an address where the nonprofit will be located. Most states require an actual street address rather than a P.O. Box, even for organizations that are otherwise run “virtually.” Some founders are comfortable using their home address, but be aware that this address will be visible to the public, and some jurisdictions may require you to obtain a special business license to operate an organization from your home (even if the address is merely a place to receive mail and not where programs are carried out). Virtual offices will generally satisfy state law requirements, but this will cost money. Finding and deciding on the address where the organization will be located will often be a key factor in deciding where to incorporate.
Of course, some states are more burdensome in their requirements than others (New York and California are two well-known examples). But if your organization is carrying out activities or raising funds in these states, you will generally have to comply with their laws regardless of where you incorporate. Thus, the question of where to incorporate generally comes down to where you foresee the organization operating.
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