Is Delaware the Best Place to Incorporate a Nonprofit?

By Devin McDougall, SELC Volunteer

Most nonprofit corporations are formed under the laws of their “home state,” that is, the state in which the incorporators reside or in which the nonprofit plans to conduct most of its operations. This is quite different from for-profit corporations, as more than 50% of publicly traded companies in the United States are incorporated in Delaware. Many of the advantages that Delaware provides to for-profit corporations, such as a specialized legal system well-versed in business law, are less applicable for nonprofit corporations.

However, incorporating as a nonprofit under Delaware law can offer certain advantages over other states.

To start, it is important to note that unlike most states, Delaware does not have a separate nonprofit corporations statute. Instead, Delaware nonprofits are governed by the applicable provisions of the Delaware General Corporation Law (“DGCL”).

One advantage provided to corporations under the DGCL is flexibility in internal structure, especially for smaller corporations. Unlike some states such as New York, the DGCL requires a corporation to have only one director. A nonprofit corporation in Delaware must have members, but directors can serve as the only members. Unlike California, there is no requirement for a majority disinterested board. Finally, Delaware does not require the naming of corporate officers.

Delaware also generally applies less cumbersome regulation to the formation and operation of nonprofit corporations than some other states. Unlike New York, which requires in certain circumstances the approval of various state agencies prior to the formation of a nonprofit, an individual can form a Delaware nonprofit corporation simply by filing a certificate of incorporation. Delaware also does not require nonprofit corporations formed under Delaware law to register with its Attorney General’s office or file annual separate financial reports to the state (though if the nonprofit operates in Delaware, it may be required to file a copy of its federal Form 990 with the Delaware Attorney General). Finally, unlike some states, Delaware does not require any state government approvals for nonprofit corporate changes such as amendments to the certificate of incorporation, mergers, and dissolutions.

If you choose to incorporate in Delaware instead of your home state, please be aware of the following requirements. You must retain a Delaware registered agent to received service for you in Delaware. Fees for this service can run from $165 – $250 annually. Additionally, you may need to duly qualify to operate as a charity or corporation in whichever states you work in, and you may be subject to some registration or regulation requirements by virtue of your operations there. However, due to the “internal affairs” principle of American corporate law, internal matters such as the governance and structure of the corporation would generally still be governed by Delaware law.

Despite these requirements, Delaware incorporation can be an attractive choice, especially for would-be incorporators from states such as New York, which heavily regulate nonprofit formation and operation. For example, the New York Lawyers for the Public Interest guide to incorporating a nonprofit provides instructions for incorporation under both New York and Delaware law, and notes that “[i]t is not uncommon for a not-for-profit corporation operating in New York to be incorporated in Delaware.”

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What is a community-owned economy?
Traditional economic development models focus on attracting business and real estate investments from outside of a community. The unfortunate result is that wealth leaves the community, rather than remaining available for the community’s benefit. In a community-owned economy, community members have access to ownership interests in local businesses and real estate and local workers participate in the governance and growth of the enterprises in and affecting their communities. Through education and advocacy, the SELC Community Enterprise Law Project seeks to adapt existing laws and implement  legal policies that support people’s ownership, both on paper and in practice, in the wealth existing in their communities.