Need to incorporate in the best state!
September 14, 2010 7:43 PM   Subscribe

What is the best state for a nonprofit to incorporate in?

I'm part of a small nonprofit organization which is international in nature. Its only base/office operates in east Africa, but the executive board members are from around the world, and mostly the USA.

We have 501(c)(3) status in the USA, but somehow we missed the initial step of incorporation and are trying to remedy that. Because we have no specific presence in a state, we could incorporate anywhere. We have prepared the paperwork to incorporate in California because several board members are there, but it came up that we may have to pay employment tax (we employ one American citizen in Africa). Now I am wondering if we should look for a more tax-advantaged state, if one exists, while we have the chance. Does anyone have advice?

Please, I realize that this question could probably be answered best by a lawyer, and you are not my lawyer, but we are a super small nonprofit and we don't have money to pay a lawyer for consultations, so answers telling us to talk to lawyers aren't very helpful to me. We did the 501(c)(3) on our own just fine and we can do this on our own too.
posted by treehorn+bunny to Law & Government (9 answers total)
I'm the director of a non-profit. IRS laws will apply, of course, to all states. I don't believe there are any states that require a matching employer contribution for state income taxes, in which cast it makes no difference. Surely, as a non-profit, you have an accountant, perhaps you should check with them.
posted by HuronBob at 8:09 PM on September 14, 2010

oops.. that's "in which case"
posted by HuronBob at 9:41 PM on September 14, 2010

The attorney of someone close to me opted for Delaware with their non-profit. Sorry, can't really elaborate more.
posted by halogen at 10:56 PM on September 14, 2010

HuronBob, we do not have an accountant. We generally don't pay for anything in the USA so we can send all our money to Africa.

halogen, Delaware has definitely crossed my mind but I was told that it wasn't an advantage for nonprofits as it is for for-profit businesses, and I don't know enough to say otherwise! But thanks for trying to answer.
posted by treehorn+bunny at 5:57 AM on September 15, 2010

At least in our state (Missouri), you'll have to have a registered agent and that agent will need an actual, physical address in the state (ie, not a PO box). So that may be a consideration.

Of course it's common to have a lawyer or some kind of registered agent service act in that role but if if you don't even have a lawyer you can ask this type of question, maybe this is an issue for you.

Also and FYI, many (most?) large law firms will do pro bono work for nonprofits and have a fairly simple application process for doing so. It is well worth it even as a small nonprofit to have that resource that you can ask basic questions like this, will act as your registered agent, etc etc etc.
posted by flug at 6:40 AM on September 15, 2010

I'm not aware of an important difference among the states; I'm sure there are some that charge $200 instead of $125 for their annual charitable organization certificate or what-have-you, but that's not enough of a difference to make a difference.

Choosing a state is probably the least of your problems. If you have 501(c)(3) status but somehow didn't incorporate first, you may have more to resolve than you know. (If you have an employee in the United States, you may owe back taxes and penalties, too -- to the federal government, not a particular state.) I would be inclined to try to solve this from within whatever state the bid for 501(c)(3) status originally occurred, just in the interest of minimizing potential red tape. If that's a state with good board member presence, so much the better.

Once you're incorporated, you'll have annual tax reporting obligations (the federal 990 form and a parallel state form, plus reporting and paying any sales tax you may incur, even if it's zero). If you ever want to attract institutional donors, they'll typically want to examine your independently audited finances. For all these reasons, your organization is going to need to consult with an accountant, so you may as well look for one of those first, in the state in which you choose to incorporate.

There's a whole mini-industry of CPAs who do annual audits of nonprofits and who know the ins and outs of nonprofit status. Call the finance person at half a dozen kindred nonprofits in the incorporation state you choose and ask if they recommend the one they use -- you'll get at least one glowing recommendation. This is definitely something you should tackle without delay, and certainly try to resolve before the end of the year. On January 1, a new year of being out of status begins, with the potential of additional penalties and additional hoops to jump through to bring your organization into compliance. Good luck!
posted by gum at 6:43 AM on September 15, 2010

Oops, I see you have an employee in Africa, not the States. That's another tricky one for purposes of status and federal reporting obligations. You need an accountant!
posted by gum at 6:46 AM on September 15, 2010

I'd look for an organization that looks to hook up lawyers and accountants who want to volunteer with non-profits such as yours. They do exist.
posted by Ironmouth at 6:46 AM on September 15, 2010

Ironmouth, I'd love to hear more about this! The only place I know is and they do not have many accountants or lawyers (I have already checked and messaged the ones who are there).

Yes, we have an American employee in Africa, I just calculated the withholding for her first paycheck so hopefully we're doing it right so far. I hope we will be able to afford an accountant by next year.

Flug, we do have a registered agent we're going to use for CA, that is a good point that we might need this for any other state too.

I did the 501(c)(3) using my own address in MA. This is our listed address in GuideStar database. However, I will be moving out of this state in less than a year!

thanks for the thoughts!
posted by treehorn+bunny at 7:55 AM on September 15, 2010

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