Real Talk: the Delaware Corporation and your Nonprofit

Are there any benefits to a Delaware-based nonprofit corporation?

Many people who start a nonprofit (particularly those who have a strong background in business) tend to think that Delaware is the best state to incorporate in. This idea often comes from looking at the incorporation process from a corporate standpoint, as Delaware’s business law and reporting requirements are some of the most flexible in the country. Corporations formed in Delaware that do not transact business there also do not have to pay corporate income tax. For this reason, some founders decide to incorporate their nonprofit in Delaware, and then get a certificate of authority to operate in their home state. However, are there any real benefits for a nonprofit to register in Delaware, as there are for an LLC? The short answer: no, not really.

It Will Most Likely Cost You More Time and Money

Starting a nonprofit can be a lot of work no matter what state you do it in, but if you’re incorporated in a state other than the one you’re operating from, it will likely cost you both time and money yet not bring any substantial benefit..Here are the major things to be aware of:

1. If your nonprofit is registered in Delaware, you’ll need to find a Registered Agent in Delaware. (A Registered Agent, as a reminder, is responsible for receiving all of the official legal correspondence for an organization. The Registered Agent is also the point of contact for issues such as lawsuits, and can become liable if they do not act in a timely fashion.)The Registered Agent has to be a resident of the state of incorporation, so unless you know someone in Delaware who is willing to serve as your Registered Agent, you will have to pay a service to do that. Registered Agent services can cost hundreds of dollars per year.

2. If your organization is incorporated in Delaware, you will file your organization’s annual reports in Delaware. This includes a copy of the IRS Form 990. (Yes, there’s a filing fee.)

You’ll Have More Compliance Paperwork To Deal With

If you are planning on operating in a different state than you incorporated in, you will likely be required by your state government to file a Certificate of Authority for your nonprofit. A Certificate of Authority is needed to register a corporation with the Secretary of State’s office in a non-resident state, and in some states, it can cost more than the incorporation fee itself. Also, if you incorporate in Delaware, you still have to register to solicit funds in your state of operation.

You’re Still Liable in your State of Operation

If your nonprofit is operating in your home state, you will still be bound by the laws of that state. In this sense, incorporating your nonprofit in Delaware will not necessarily help you avoid liability in your home state. How so? Well, if someone sued your nonprofit, they could sue you in Delaware (if you incorporated in Delaware), which might be better for you from a liability perspective. However, they could also sue you in your nonprofit’s state of operation (most likely your home state). And your home state might not be as flexible as Delaware is in terms of business law. So, you’re not actually escaping liability altogether just because you incorporate in Delaware.

The Bottom Line

Incorporating in Delaware doesn’t have the same benefit for nonprofits as it does for for-profit corporations. In fact, it will most likely end up being more of a headache. At the end of the day, it’s your choice. At ExemptMeNow, we will gladly help you through the incorporation process in whatever way works best for you. However, the quickest and easiest way to start your nonprofit is to do it in your state of operation, most likely your home state...you’ll end up doing business there anyway!