Incorporation (both ‘for-profit’ and ‘non-profit’) is a subject of state laws.
While the general principles and rules remain same throughout the states, there are some vital differences. For instance, there are differences in the application process , the membership requirements, the filing fee and few other norms. The difference is more pronounced in the state taxation laws. Thus the place of incorporation is a vital decision to be made when starting a non profit organization.
Technically speaking, a non profit organization incorporated in one state is a ‘foreign corporation’ in all other states and will thus have to comply to specific requirements if they conduct any business outside the state of Incorporation.
When it comes to decide the place of Incorporating a new non non profit organization, the following must be kept in mind –
a)Principal place of business: It is advisable to incorporate in a state, where the proposed organization is expected to conduct a majority of its activities, as a ‘local corporation status’ will provide several state tax exemptions and exemptions from fees applicable to foreign corporations.
In case an organization is expected to be conducting business in more than one states, it must consider incorporating in all those states which would constitute of considerable business for the organization. Most of the organizations do not incorporate in multiple state in the beginning. They incorporate in several states as the activities expands over a period of time.
b) Tax exemption – A nonprofit organization that has obtained federal 501 (c)(3) tax exemption from IRS is automatically granted tax exemption in most of the states. Thus the place of incorporation does not have a significant bearing on the taxation applicable to a start up non profit organization.