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Best States to Form Your Nonprofit: A Complete Guide

LegalGPS : Oct. 9, 2024

5:55

You need to pick one state for your nonprofit. The most straightforward approach is to consider whether you should file in your home state.

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What's considered the "home state" for my future nonprofit?

A few factors can identify your home state. It's likely the state you answer the most to these questions:

Where are your nonprofit's headquarters or physical location(s)?
Where are the majority of your nonprofit's activities?
Where is the majority of your fundraising?
Where do most of your directors and officers (and members, if applicable) live?.

Often, small nonprofits focusing on one particular region (city or state) will choose to incorporate in that state. If your nonprofit’s directors and officers live in one town and you fundraise in that town (and the surrounding cities), usually that state makes the most sense.

Factors to help you decide if your home state is the best choice for your nonprofit

Three factors are whether your home state could save you money, whether your home state could help you cut down reporting issues related to taxes, and whether you plan to expand beyond your home state.

Factor 1: Choosing your home state for your nonprofit could save you money

One benefit of incorporating in your home state is cost savings. If you decide to incorporate your nonprofit in a foreign state but are located in your home state and conduct activities there, you will need to file in your home state as a foreign entity. This is essentially doubling your filing work as well as the costs incurred.

Cost Savings Example

For example, imagine a nonprofit-aspiring person named Betty who decided to incorporate her nonprofit in Delaware. She heard Delaware was nonprofit-friendly, and it would be a smooth process. However, Betty and the rest of her directors live in Ohio. And they conduct 100% of the nonprofit's activities in Ohio.

Because of this, Betty would need to register as a foreign nonprofit corporation in Ohio. Her filing costs would increase, and the extra work of foreign registration would delay the nonprofit from focusing on the most important stuff.

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Factor 2: You might save some time and money related to tax reporting.

Another reason it makes sense to file your nonprofit in your home state is the tax reporting implications. You must report income in states where your nonprofit is registered via an informational return. If you incorporate in a foreign state but conduct most fundraising activities in your home state, you'll add unnecessary tax reporting work to your nonprofit.

Tax Reporting Example

For example, imagine Betty’s nonprofit incorporated in Delaware, and therefore she had to file for tax-exempt status both federally and in Delaware.

Unfortunately, since her nonprofit is located in Ohio, she must also file for tax-exempt status in Ohio. And she needs to file informational returns in both Delaware and Ohio. The extra work could have been avoided if Betty’s nonprofit had initially formed in her home state of Ohio.

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Factor 3: Are you expanding beyond your home state?

There are a few instances when it could make sense to incorporate in a state outside of your home state.

One such occurrence would be if your nonprofit were a multi-state nonprofit corporation. If you have locations in several states, conduct activities across those states, and have directors living in those various states, incorporating in another state makes sense. In this scenario, consider the cost of formation, state regulations on nonprofits, and annual reporting requirements when choosing the best state.

Multi-State Nonprofit Example

For example, imagine Jim and his board started “Midwest Clean River Benefit, Inc.” in 2016. The nonprofit focuses on clean river efforts across four states in the midwest. Jim and the other 11 board members live across the four states and raise funds in those states. When incorporating, Jim chose Missouri because there was not a clear home state, and Missouri offered more significant advantages (cost savings and minimal requirements) for nonprofits.

Which state should I choose for my nonprofit?

If your nonprofit work will encompass several states across the US, and there is no clear state to register, how do you decide where to incorporate? By looking at a few factors among state requirements, you can determine which state is the best to incorporate your nonprofit.

The Cost of Incorporating

This varies across all 50 states. For example, Vermont charges $125 to incorporate, while Kentucky only charges $8.

Added Fees

Certain states require additional steps (and fees) when incorporating. Be sure to check for these during your search. For example, Pennsylvania requires “Incorporation Publishing” which could cost an extra $200.

Regulations and Reporting Requirements

States vary in their regulations on nonprofits, including the reports required and filing frequency. For example, California requires that nonprofits send RRF-1, CT-694, Form 199, Form 109, and form SI-100 each year.

Other Considerations

If your nonprofit has a narrow focus (only in your home state) and is located in your home state, it’s almost always more beneficial to incorporate there.

Most states require nonprofits to register when seeking donations. So, even if your nonprofit will seek donations nationwide, it still probably makes sense to incorporate in your home state and register in other states later.

If your nonprofit will have a national focus with directors and officers spread across the country, decide as a group which state might be the best fit to incorporate.

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