Legal Minute: Pros + Cons of Incorporating in Delaware
If you are in the early stages of starting a non-profit organization (“NPO”) it’s likely that you’ve been told to incorporate in Delaware, rather than your home state. Why is that? Well, Delaware does offer advantages that other states may not offer but isn’t necessarily the best option for all NPOs. Read on to find out why you should or shouldn’t incorporate in the State of Delaware (“DE”).
01 | You Don’t Need the Approval of State Agencies
The regulations applicable to NPOs in DE are less cumbersome when it comes to formation and operation (vs. CA or NY, for example). Specifically, an individual can form an NPO in DE simply by filing a certificate of incorporation, without the approval of any state agencies, which is required in various states. Why is this helpful? Well quite frankly, State Agency approval can be bureaucratic and cause significant delay.
02 |You Don’t Need to Register with the AG ‘s Office
DE does not require NPOs formed under DE law to register with its Attorney General’s office, or file separate annual financial reports to the state. What does this mean? It means there is less paperwork, less fees for filing that paperwork, and ultimately less time spent filling out paperwork and filing it with state offices.
03 |You Don’t Need the State’s Approval to Make Amendments
DE does not require state government approval for NPO amendments to the certificate of incorporation, mergers, and dissolutions. This one may sound rather inconsequential, but in practice it can be very advantageous. For instance, if you have a big fundraising opportunity but your certificate of incorporation states a charitable purpose that isn’t necessarily as accurate as when you first formed your NPO, you may need to amend that certificate of incorporation. Amending the certificate of incorporation in DE is quick and easy because no approval is needed from the state.
04 | You Have Greater Flexibility Regarding Directors and Officers
DE allows for more flexibility in the internal structure of your NPO. Specifically, unlike California and New York, DE law only requires a corporation to have one director, instead of several. This means you and you alone can serve as a director if you so choose. Speaking of your board of directors, DE places no requirements for a majority-disinterested board. What is a majority-disinterested board, you ask? A majority-disinterested board is a board of directors that has 51% or more of its directors who are not related to or employees of the NPO. This allows more of the NPO’s officers to sit as board members than in other states. And speaking of those officers, DE does not require the naming of corporate officers. This is a bit more minor, but it can be helpful when the roles of your staff are not yet cemented and you want to make those designations later.
05 | You Get Tax and License Exemptions
There are a few tax advantages. Any NPO granted 501(c) tax exemption by the Internal Revenue Service is exempt from Delaware Corporate Income Tax, as well. Further, NPOs in DE are exempt from obtaining a Delaware business license and paying the accompanying gross receipts tax on the sales of most goods and services. This is not always the case in other states and can be a huge benefit to your organization, depending on the type of services it offers.
01 | You Need to Maintain a Registered Agent
The largest disadvantage of incorporating in DE is that of maintaining a Registered Agent for Service of Process in DE, if you are not going to physically be operating your NPO in DE. Prices to maintain a Registered Agent range from $49 per year to $249 per year, depending on if you opt for related service from the company maintaining the Registered Agent for you.
02 | You May Have to Pay Double Fees
Depending on the state, there can be issues with double fees when an NPO operates in a separate state than the state in which it was incorporated.
Of course, the list of pros and cons discussed in this article are broad strokes and the details of your NPO should be considered carefully before making a decision as to where your NPO is incorporated. DE non-profit incorporation is not a one size fits all approach, but it can be very advantageous under the right circumstances.
Disclaimer: The information in this article is presented for informational purposes only, and should not be taken as legal advice. Before acting on any information presented in this article, you should consult an attorney regarding the facts of your specific situation. We would love to hear from you, so please feel free to contact Wilkinson Mazzeo for a consultation.
Photo: Rachel Ashley
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