Here are the basic legal steps to form a nonprofit corporation under the law of Delaware in preparation for obtaining exemptions from Delaware state tax and federal tax.
1. Consider reserving your organization’s name.
As a preliminary matter, you can search to see if the name you would like to use has already been taken. (Delaware has an on-line searchable database of legal entities searchable here.) If not, you might consider reserving it. The Division of Corporations allows the reservation of names in advance of a corporation’s formation, which you may wish to consider. For a $75.00 fee, you can reserve the name you would like to use for 120 days. Reserving the name might make sense if it is a common name or you are concerned that another party might register the name.
2. Prepare and file a certificate of incorporation with the Secretary of State.
As a preliminary matter, it is worth noting that unlike most states, Delaware does not have a separate statute governing the formation and operation of nonprofit corporations. Instead, Delaware’s General Corporation Law (“DGCL”) statute applies to both for-profit and nonprofit entities. Under the DGCL, nonprofit corporations are typically organized as a type of nonstock corporation called an “exempt corporation.”
To incorporate an exempt corporation, you must file a certificate of incorporation for a nonstock exempt corporation with the Delaware Secretary of State Division of Corporations and pay the filing fee. The Division of Corporation provides a fillable pdf for this purpose located through this link, although use of the template is not required.
3. Prepare bylaws
Once you have filed the certificate of incorporation, prepare bylaws to govern the operation of the corporation.
Bylaws can either be adopted by the persons incorporating the nonprofit, or at the first meeting of the members of the governing body of the nonprofit. The bylaws of the Delaware Alliance for Nonprofit Advancement, a Delaware nonprofit corporation, may provide a useful example.
4. Attend to organizational requirements
Once the corporation is formed, apply for a federal Employer Identification Number (“EIN”), even if you do not have employees. The EIN is used as a unique number to identify the corporation to the IRS. The IRS has provided information on how to obtain an EIN which you can apply for on-line here.
Next establish a file of organizational documents, such as the certificate of incorporation, by-laws, minutes of meetings, banking information, and so forth, to keep as the corporate records book of the nonprofit corporation.
5. Seek federal, state, and local tax exemptions
To apply for recognition under Internal Revenue Code (“IRC”) Section 501(c)(3), prepare IRS Form 1023, which is designed to assess an organization’s eligibility for 501(c)(3) tax exemption.
If you are planning to seek a federal tax exemption, you should do so promptly. If you file Form 1023 within the first 27 months of the entity’s existence, and the IRS makes a favorable exemption determination, exemption will be considered retroactive to the original date of incorporation. This will be relevant for the deductibility of any contributions you receive before the approval of exempt status. Additionally, many 501(c)(3) organizations are required to file an annual information return with the IRS called the Form 990. Be sure to determine if your organization is so required and take the steps necessary to ensure it is timely filed. For a guide, prepared by the IRS, to which types of organizations must file a Form 990, see this page.
Under Delaware law, exemptions from various state and local taxes are available for corporations exempted from federal income tax under Section 501(c)(3) of the Internal Revenue Code (IRC). An overview of available exemptions, prepared by the State of Delaware Department of Finance, Division of Revenue, is available here. 501(c)(3) nonprofits are automatically exempted from the Delaware corporate income tax and do not need to apply. Exemptions are available by application from various state and local real property taxes and business license fees. For information regarding exemption from property taxes, see 9 Del.C. §§ 8101-8110. Rules vary based on the type of nonprofit, the use of the property, and the county the property is located in. (Note: Delaware does not collect a sales tax.)
Finally, it is worth noting that unlike in some states, Delaware law does not require that Delaware nonprofits register with its Attorney General, or obtain state government approval for corporate changes such as amendments to the certificate of incorporation, mergers, and dissolutions. However, if the nonprofit is conducting activities in Delaware, it must file a copy of its federal Form 990 annual financial reporting return with the Delaware Attorney General.[xv]
- Forming a Delaware Business Entity: http://corp.delaware.gov/howtoform.shtml
- Trademark sites: http://corp.delaware.gov/trademark.shtml; http://www.uspto.gov/trademarks/index.jsp
- Applying for 501(c)(3) exemption: http://www.irs.gov/Charities-&-Non-Profits/Application-for-Recognition-of-Exemption; http://www.irs.gov/instructions/i1023/ch01.html
Written by Devin McDougall.