Where to Incorporate?
An early decision founders of new non-profit organizations must make is where to incorporate. A U.S. charitable, religious, or educational organization has its choice of incorporating in any of the 50 states as well as the District of Columbia. With this many choices, founders may ask if it is advantageous to incorporate in one state over another. When it comes to for-profit companies, it is common for them to incorporate or organize in Delaware due to tax or regulatory issues. We recently ran across an article advising non-profits to incorporate in Delaware. We thought it would be helpful to address if non-profits derive any advantage from incorporating in Delaware or another state in particular.
Generally, a non-profit organization should incorporate in the state where most of its activities will take place. Each state has its own version of laws that govern not-for-profit, non-profit, and other similar corporations. These laws are based on model acts which tend to include similar provisions across the states. When comparing the laws to see the variations from state to state, we find most states are consistent in their approach to non-profit governance. However, an exception is New York. In our experience, New York takes a heavy-handed approach to non-profit governance and requires state approval to make major corporate changes such as merging or consolidating with another organization. This can be stifling to non-profits trying to re-structure their operations. The above article that recommended incorporating in Delaware was directed to New York non-profits, so from this perspective organizations could benefit from incorporating in Delaware or a neighboring state.
Something to consider is that incorporating in a state that has no connection to the organization can increase an organization’s expenses and administrative burdens. In addition to paying for a registered agent in that state and filing annual reports in that state, the organization could unintentionally subject itself to taxes and fees it would not otherwise owe. For example, California and Texas corporations are subject to their state’s franchise taxes. Another example is that in Wisconsin, only non-stock corporations incorporated in Wisconsin are eligible for property tax exemption. An organization owning property in Wisconsin would miss out on this benefit if it incorporated in another state.
What should an organization do if it discovers that it is incorporated in a state to which it has no connection? In many cases, it may not be worth the trouble to change the state of incorporation. However, in situations where the organization wants to reduce its expenses or seek state tax exemptions, it may make sense to change the state of incorporation. Many states allow corporations to convert from one state to another state. In states without conversion laws, it may be possible to change the state of incorporation through a merger.
This article is provided for general information and should not be relied upon as legal advice for a specific situation. If you are in need of specific advice or legal representation, please do not hesitate to contact us.
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