Nonprofits leaders often desire to move their nonprofit organization’s legal domicile from one state to another. Leadership may decide to move and wish to take the organization with them. In cases where the work is dispersed around the country, the organization may become frustrated with burdensome regulation in the state where it is domiciled and decide shop for a more favorable legal home.
Fortunately, where there is a will, there is always a way. The laws in this area have been evolving and it is getting easier to move a nonprofitâ€™s domicile (or legal home) from one state to another. Typically a nonprofit corporation can pursue one of three options as follows:
- Domestication/Conversion to a New Domicile. If both stateâ€™s laws permit it, the nonprofit can file Articles of Domestication (sometimes also called â€œConversionâ€) with both states, attaching new Articles of Incorporation that comply with the laws of the new state. This mechanism permits the organization to cut ties with the original state. This approach permits the organization to retain its tax identity. Its EIN number will remain the same and it will not have to reapply for tax-exempt status. The amendments to governing documents and change in domicile will have to be reported to the IRS on the organizationâ€™s next Form 990.
- Form New Entity in the New State. If one or both stateâ€™s laws do not permit a simple domestication/conversion, the organization can form a new nonprofit corporation in the desired state and merge the existing entity into it. Alternatively, if there is no reason to maintain the corporate identity and history of the existing entity, the assets and programs could be transferred to the new entity in the desired state and the original entity dissolved. This approach is the most time consuming and expensive as it requires the new corporation to obtain a new EIN number and re-apply for tax exempt status. Once the new entity is approved, Articles of Merger must be prepared and filed in both states. Some states require Attorney General approval.
- Register as Foreign Corporation in the New State. If the states in question do not permit domestication or conversion to another state and the organization does not want to incur the expense of forming a new entity, the existing organization can simply register to do business as a foreign corporation in the new jurisdiction. Registering as a foreign corporation in the new state permits it to legally operate there. The downside is that the organization will have to comply with regulation in both states. For example, it will have to maintain a registered agent in both states, file annual reports in both states, and may have to register to solicit funds in both states.
Its good to know that a nonprofit’s initial choice of domicile is not written in stone. Where it makes sense to move the organizationâ€™s operations to another state, there is always a way. An experienced lawyer can help navigate the process and evaluate the best domicile for the organization.
UPDATE: See Good News for Nonprofits Moving to a New StateÂ for new guidance that may eliminate the need to re-apply for tax-exempt status in some restructuring transactions.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.