Choosing Between a Domestic or Foreign Nonprofit

Choosing Between a Domestic or Foreign Nonprofit

The first decision that must be made when forming a nonprofit corporation is whether it will be domestic (formed in the state in which it is operating) or foreign (formed in another state). In nearly all cases, it is best to form a domestic corporation. While the paperwork is about the same, there is an extra registration fee for foreign corporations, and in all states, excluding New York, you must hire a registered agent in the state in which the foreign corporation is formed.

Reasons for Incorporating Out-of-State

There are two good reasons to use a foreign nonprofit corporation. First, you may wish to have less than three directors and your state may require three. Many nonprofits have more than three directors because this broadens support and may look better to those providing grants and to the IRS. However, some people who intend to put a lot of their time and money into a new organi­zation are not willing to share the power to make decisions. It may be possible to get friends or relatives to be the additional directors, but if this is not convenient, you could incorporate in a state that allows a single director.

The following states allow a single director in a nonprofit corporation.

  • Arizona
  • California
  • Colorado
  • Delaware
  • Georgia
  • Iowa
  • Kansas
  • Maryland
  • Massachusetts
  • Nevada
  • North Carolina
  • Oklahoma
  • Oregon
  • Pennsylvania
  • Virginia
  • Washington

The second reason to use another state is to have a stock-based nonprofit corporation in a state that does not allow it. A stock-based nonprofit corporation is one that is controlled by its stockholders. This keeps the control of the organization to a limited number of persons. Of course, the stockholders cannot receive any dividends or profits of the organization.

Most states do not allow nonprofits to be set up as stock-based, so to form one you need to set up the organization in a state that does. Check with your state to see if a stock-based nonprofit qualifies to do business there.

  • Definition of a Nonprofit Corporation
    A Nonprofit corporation is a special type of corporation that has been organized to meet specific tax-exempt purposes. To qualify for Nonprofit status, your corporation must be formed to benefit: (1) the public, (2) a specific group of individuals, or (3) the membership of the Nonprofit. Examples...
    read more
  • Reasons to Form a Nonprofit Corporation
    As someone involved with a charitable cause, you might be weighing the benefits of formally organizing your nonprofit. While it might take a little extra work, only with a state-recognized nonprofit corporation can you obtain private and public grants, low-cost postage rates and be exempt from...
    read more
  • Comparing a Nonprofit to an LLC or Corporation
    Nonprofit corporations enjoy the same liability protection as regular corporations and limited liability companies. In other words, your directors, trustees, members, and employees are not generally responsible for corporate debts and liabilities. There are also significant federal and state tax...
    read more
  • Tax Exemption for Nonprofits
    Forming a nonprofit corporation with your state does not automatically qualify you for federal tax exemption with the IRS. Once you have created your nonprofit by filing the necessary documents with your state, if you want federal tax exemption, you must file a separate application with the IRS....
    read more
  • Commercial Rights of Nonprofits
    The fact that a corporation is a nonprofit does NOT mean the corporation cannot sell goods or services for money. In fact, many nonprofits make money selling everything from clothing to medical services. A nonprofit can pay salaries to officers and employees. But, in order to maintain nonprofit...
    read more
  • Managing a Nonprofit Corporation
    Directors are responsible for the management and operation of a nonprofit corporation. Nonprofit directors can serve with or without compensation. If you decide to compensate directors, remember that compensation must be deemed "reasonable" by the IRS. Directors are under the same constraints of...
    read more