The state in which you incorporate your nonprofit organization is called the nonprofit’s state of domicile. Sometimes nonprofits may determine that moving to a new state is the best option for continuing their work. Common reasons for moving include a change in physical location, increasing regulatory burdens, and a lack of meaningful connection to the original state of incorporation.
Moving is not always an easy or quick process, and there are several options for moving a nonprofit from one state to another. The process of domestication varies depending on the state of original incorporation and the state in which you wish to move. In some cases, the nonprofit’s leadership can choose which option makes the most sense for them. In others, the law is restrictive, and there may only be one way of accomplishing a domestication.
Understand Your Motivation for Moving
Before diving into the various options to domesticate, it’s important to assess why the move is necessary. A few common reasons for relocating a nonprofit include:
- Expanding services to a new area.
- Accessing better funding opportunities.
- Improving operational efficiency or reducing costs.
- Proximity to a target audience or key stakeholders.
Identifying your reasons will guide the rest of the process, including which option makes the most sense and which steps should be prioritized.
1. Domestication/Conversion
The most straightforward approach is often to simply domesticate to a new jurisdiction. If both state’s laws permit it, the nonprofit can draft and file Articles of Domestication and new Articles of Incorporation complying with the law in the nonprofit’s new home state. Once the documents are processed in both states, the nonprofit will have legally moved.
Some states’ laws do not explicitly permit (or deny) domestication. In those cases, the nonprofit will likely need to go through a conversion. A conversion occurs when an entity type “converts” into another entity type. For example, an LLC might convert into a corporation or vice versa. In states that don’t provide for domestication, the nonprofit will convert from a “domestic” nonprofit to a “foreign” nonprofit.
2. Forming a New Entity
If one or both states do not permit a simple domestication or conversion, the nonprofit can form a new nonprofit corporation in the desired state. Under this approach, the new nonprofit can either merge with the old entity, or the nonprofit leadership could simply dissolve the old nonprofit.
Merging is typically the recommended option where the organization wants to maintain the nonprofit’s identity and history. If that’s not important to the nonprofit, merging may not be necessary.
In 2018, the IRS issued a Revenue Procedure providing the framework for nonprofits who form a new entity to retain the old organization’s EIN and tax-exempt status. This change will need to be reported on the nonprofit’s next annual Form 990.
3. Registering as a Foreign Corporation
In the event the states in question do not permit domestication or conversion to another state and the organization chooses not to incur the costs of forming a new entity, the nonprofit can simply register to do business as a foreign corporation in the new state. Registering as a foreign corporation permits the nonprofit to conduct business in that state.
The primary disadvantage to registering as a foreign business is increased administrative burden. The nonprofit will effectively be treated as existing in both states and will be subject to the regulatory requirements in both states. For example, the nonprofit will need to maintain a statutory agent and file annual reports in both states.
What about your Tax-Exempt Status?
For those nonprofits that are also tax-exempt, your exemption will follow the organization to its new state of incorporation. This happens automatically and there is no requirement for the organization to re-apply for tax-exempt status so long as the nonprofit continues to be organized for the same exempt purposes for which it was granted exempt status. Note that this rule does not apply for mergers or acquisitions as those involve creating an entirely new entity. In those situations, the new entity will have to apply for its own separate tax-exempt status.
Even if the nonprofit does not have to re-apply for exemption, it will need to disclose to the IRS its new state of domicile on the nonprofit’s Form 990 that year as well as notify the IRS of the nonprofit’s new address using Form 8822-B.
Conclusion
Relocating a nonprofit organization from one state to another is a significant decision that involves careful planning. Whether driven by strategic growth, better resources, or simply a need for a new location, it’s essential to ensure that the transition is legally compliant and smooth for your organization. Before making any decisions, it’s always wise to consult with legal counsel familiar with nonprofit law in both states. This will help ensure that your move is legally compliant and positions your nonprofit for continued success in its new location.
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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 federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.
Kyler Mejia is an associate (bar admission pending) with Caritas Law Group, P.C. Kyler counsels nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising matters nationwide and advises donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.