Nonprofits periodically ask how they can change their legal domicile or state of incorporation from one state to another. For some, an evolution in the location of physical or virtual headquarters, the type and nature of taxable or tax-exempt affiliated entities in their corporate structure, or the nexus of significant programs prompts the question; for others, a migration far from their original formation state causes the topic to resurface every few years. When thinking about a change in the state of incorporation, nonprofits should understand the legal, administrative, and operational considerations that should be balanced when assessing if their current domicile is suitable, and the procedures available to them to move elsewhere if having a legal home in a different state would better align with their mission and goals.
Consider the Ins and Outs
Every nonprofit has one domicile. Nonprofits are considered domiciled in the state in which they are legally incorporated, even if their main office, key assets, and/or primary place of operations are based elsewhere. A nonprofit's domicile has far-reaching consequences. Differences among states can affect how a nonprofit's internal affairs must be conducted and can impact liability protections, state and local tax exemption availability, formation requirements and ongoing maintenance obligations, and the procedures by which decisions for the organization can be made, among other important considerations. So, choosing the state in which to create a nonprofit is a critical decision at the outset.
So too is the later evaluation of whether to keep or modify the domicile. Common reasons impacting the choice of domicile include a lack of a significant or ongoing connection to the original state of formation, managing corporate governance requirements and reforms, having multiple subsidiary or related organizations without uniform domiciles, the availability of state or local tax exemptions, and other business or optical concerns. Taking advantage of the benefits of a different domicile's legal regime may be appealing, but a nonprofit's particular circumstances may make changing domicile impractical or unlikely to have a meaningful practical impact.
When considering a different domicile, nonprofits should take care to understand the applicable laws of the current domicile and where the nonprofit desires to move. How the new state's laws and operating environment will—or will not—impact the organization practically when compared with the current domicile is an important factor. The time, cost, and continuity considerations that attach to nonprofit mergers, dissolutions, or domestication should also be weighed. In some cases, an organization may be able to continue to operate in much the same way as it always has without modifying its domicile. In others, changing the legal home with careful advance planning may be the best way to achieve corporate governance, tax, operational, or other strategic goals.
Statutory Domestication
The nonprofit corporation laws of some states allow for domestication. Domestication is a legal process that moves a nonprofit's state of incorporation from one state to another. Once "domesticated," the nonprofit is automatically governed under the laws of the new state rather the under the laws of its original state of incorporation.
While the exact process to complete domestication varies depending on the states involved and a nonprofit's own internal governance rules, the domicile can normally be switched through a simple filing with the corporations' regulatory agencies in both the old and new states. This is typically, but not always, the states' secretary of state. Once the domestication election is filed, the nonprofit then notifies the Internal Revenue Service to report the change in domicile and, depending on the old and new state involved, may also need to communicate the change to state and local taxing authorities.
The main advantage to domestication is continuity. Legally, the nonprofit remains the same except for the governing law applicable to its internal affairs. Federal tax-exempt status remains in place, and operations remain intact without the need for actions such as renegotiating or amending contractual agreements, transitioning payroll, or shifting other administrative matters from one entity to another.
For statutory domestication to be an option, both the old state and new state must permit domestication . But many states do not expressly allow domestication out of the state. Consequently, domestication is not always an available option.
Moving by Merger
When statutory domestication is not available, nonprofits can usually accomplish the same result as domestication through a merger. By forming a new nonprofit corporation in the desired state of formation and combining the current nonprofit with and into the new one, the nonprofit can effectively move its state of formation.
The exact procedure of moving states depends on the corporate laws of both the original state of incorporation and the target state. Although domicile change entails internal restructuring, it is important for proper notice, approval, and other formalities to be strictly followed to avoid defects in the process. The merger process to effect the change in domicile can be time-consuming and costly. For organizations facing particularly antiquated or burdensome governance requirements, the long-term payoffs can outweigh the near-term costs.
In some cases, the proposed merger requires regulatory notice and/or review and approval of the request to change domicile, and the transfer of assets in connection with the reorganization. Although nonprofits enjoy the right to select the laws that govern internal affairs, depending on the states involved, internal reorganizations can draw negative attention by the old state, particularly if they are viewed as an attempt to evade regulation, so there should be some reasoned basis for the selected new domicile that can be substantiated.
Even where the more streamlined domestication procedure is not available and a merger is required to carry out the change, a 501(c) tax-exempt organization that merely changes its domicile from one state to another does not generally need to file a new application for federal tax exemption and can keep the same taxpayer identification number. Previously, long-standing IRS requirements mandated applying for a new exemption determination following a change in the state of incorporation. Now, tax-exempt organizations can simply disclose the domicile change or merger as a structural change on its federal Form 990 without a new exemption application or determination required.
Simply Relocating
Mere changes in physical location of offices, staff, or activities over time do not, by themselves, necessitate a change in the state of incorporation. It is common for a nonprofit to be formed in one state but to have offices, employ staff, or engage in business activities in other states. The incorporation state's law will continue to apply to the nonprofit regardless of whether the nonprofit physically moves or conducts activities outside of its state of formation or does not conduct any business in the original state at all.
In these cases, it is often simplest to register to do business in a new state and keep the original corporate domicile in place. When expanding operations to a new state, the nonprofit will be required to register to do business in the new state so that the state and public obtain certain basic details about the business. This registration is typically, but not always, called a foreign business qualification or application for authority. Once the nonprofit is registered, maintaining the registration typically requires the submission of periodic reports, which provide updated information on the organization's address, registered agent, and governance structure, and more frequent reporting may be required as other significant changes occur.