Although most U.S. nonprofits are formed under the laws of their home state, it is common for experienced nonprofit attorneys to recommend a Delaware entity. Most U.S. and international practitioners are aware that a large number of U.S. incorporations take place in Delaware: as of last year, 66 percent of Fortune 500 companies were incorporated in Delaware. The reasons generally cited for this disproportionate rate of Delaware incorporations include a well-developed body of case law that provides predictability; statutes that provide flexibility and are continuously updated; a well-respected judiciary and dedicated forum for disputes, the Delaware Court of Chancery; experienced service providers; and a customer-service oriented and efficient secretary of state. Delaware incorporation can be advantageous for nonprofits, too, under the right circumstances as explained by Ally Law member firm attorney Leanne C. McGrory in the American Bar Association publication The “Delaware Advantage” Applies to Nonprofits, Too.
Advantages for nonprofit incorporation in Delaware include ease of formation (no prior approval is needed from state agencies), no approval from state agencies is required for amendments, registration is not required with the attorney general (or equivalent office), and there is permissive, rather than prescriptive, corporate governance making the start-up of a nonprofit very simple. In addition, there are significant tax advantages: Delaware 501(c) corporations are exempt from Delaware corporate income tax and Delaware franchise tax. Exemptions are also available from obtaining a Delaware business license and paying gross receipts tax on the sale of most goods and services and from various state and local real property taxes. How these advantages play out in practice varies given the specific factual situation and what other state(s) might be considered. However, it is safe to say that nonprofits with a global focus, or those based out of California or New York, may be especially suited for Delaware incorporation.
As in any business organization decision, possible disadvantages should be considered as well. For example, some complain that Delaware’s oversight of nonprofits is inadequate and that the flexibility the Delaware statute, combined with the lack of active oversight, can have unintended consequences. Overall, however, in many instances the low administrative burden, lack of bureaucratic delay, ease of formation and amendment, flexible governance, and favorable tax treatment make Delaware an advantageous choice for nonprofit formation. Assess your nonprofit’s needs with your Ally Law member firm to determine the best state of incorporation to meet your goals as well as the best structure for governance of your nonprofit. For more information about Ally Law member firm services and outstanding lawyers, contact us at email@example.com.