Business, Corporate & International Law Blog

Best State to Start a 501(c)(3) Nonprofit: DE vs. NY

New York versus Delaware - what is the best state to incorporate a 501c3 nonprofit?

When starting a new nonprofit, a common question is “what is the best state to incorporate in?” Particularly for our New York clients, seven-out-of-ten times, our answer is Delaware. What about the remaining three?

Four factors must be analyzed in choosing a state of incorporation flexibility, cost, home team advantage and reputation. Different nonprofits have different priorities, so the “best” state in which to form a nonprofit is the state that best reflects a particular nonprofit’s priorities based on this analysis. This blog post looks at these factors through the lens of two states: Delaware and New York.


Flexibility

A nonprofit’s state of incorporation determines what law governs the “internal affairs” of the nonprofit. A nonprofit’s “internal affairs” are the system of rules governing relationships between the nonprofit and its insiders (such as directors, officers and members). Choosing what law governs a nonprofit’s “internal affairs” is of paramount importance because it basically dictates what a nonprofit and its insiders, can or cannot do, what they must do, and how they need to get things done.

Rigid New York Nonprofit Law

New York incorporated nonprofits are subject to the New York Not-for-Profit Corporation Law (the “N-PCL”). The N-PCL is one of the most onerous nonprofit corporate laws in the United States. It imposes many restrictive and draconian requirements on the internal affairs of nonprofits. These include:

  • Age restrictions on directors;
  • An absolute minimum of three directors;
  • An absolute minimum of three members, for membership nonprofits;
  • A mandated conflict of interest policy;
  • A mandated investment policy;
  • A mandated whistleblower policy for nonprofits of a particular size;
  • Special procedures and record keeping rules for approval of transactions between insiders and the nonprofit;
  • Annual newspaper publication requirements for private foundations;
  • Restrictions on who can be president, and special voting and record keeping rules if the president will also be an employee;
  • Maximum terms for directors;
  • Mandated super-majority voting for certain corporate decisions;
  • Mandated audit thresholds;
  • Stricter financial conflicts of interest rules than those required by the Internal Revenue Service (IRS); and
  • Requiring the blessing of the New York attorney general or a New York court before a charitable nonprofit can take certain actions decided by the board or members, including expansion of the nonprofit’s mission, engaging in transactions involving a substantial amount of the nonprofit’s assets, moving out of New York, and even closing down.

While some of the above reflect corporate governance “best practices,” others are simply bureaucratic and superfluous. The N-PCL takes away the ability to choose what practices to follow, and forces it upon a nonprofit on pain of investigation by authorities and forced dissolution.

The N-PCL also can potentially hobble businesses and organizations that have close relations with a New York incorporated nonprofit. As indicated above, the N-PCL’s financial conflicts of interest rules are more strict than even those of the IRS because it extends restricted transactions to affiliates of a New York incorporated nonprofits and insiders of those affiliates (and their family members and controlled entities). So whereas a transaction between the spouse of a large donor of a nonprofit with a for-profit subsidiary business of the nonprofit would normally not be a problem for the IRS, if the nonprofit were a New York incorporated nonprofit, the transaction could subject the nonprofit, the for-profit and the spouse of the donor to investigation by New York authorities, as well as possible penalties.

Flexibility for Delaware Nonprofits

But what if a nonprofit could operate in New York without these restrictions and requirements? It can! While New York’s N-PCL is one of the most restrictive nonprofit laws in the country, Delaware’s General Corporation Law (GCL), which covers both nonprofits and for-profits, is one of the most flexible. Delaware has none of the above N-PCL requirements and restrictions. With a few small exceptions and procedural issues (some things must go in the certificate of incorporation and not the bylaws), a nonprofit incorporated in Delaware can be structured in the manner it wants.

By incorporating in Delaware, a nonprofit chooses to be subject to the flexible “internal affairs” rules of the GCL, allowing the nonprofit to avoid many of the shackles imposed by the N-PCL, even if the nonprofit will operate or even be headquartered in New York. However, there is an important caviat. Regardless of the state of incorporation, a nonprofit may still be subject to state level charities regulations. For example, all nonprofits that have registered with the New York State charities bureau are subject to similar audit thresholds as those of incorporated in New York.

So, compared with New York, Delaware is the best state of incorporation in terms of flexibility.


Cost

Just as with a business, in order for a nonprofit to operate on a continuous and systematic basis in a state, a nonprofit needs to either incorporate in the state or register as a “foreign nonprofit” in the state. Registering as a “foreign nonprofit” increases both the startup cost and maintenance cost involved in running a nonprofit. The below costs are as of 30 June 2021.

New York & Delaware Nonprofit Incorporation Costs

The minimum cost of incorporating a nonprofit in New York is $85. This consists of:

  • $75 certificate of incorporation filing fee
  • $10 certified copy fee
  • $0 registered agent fee (as New York only requires a United States address, and not a registered agent)

The minimum cost of incorporating a nonprofit in Delaware is $184. This consists of:

  • $107 certificate of incorporation filing fee (based on a three-page certificate at $89 for the first page, and $9 for each additional page)
  • $50 certified copy fee
  • $45 registered agent fee (based on the lowest cost commercial Delaware registered agent service available)

The minimum cost for registering a Delaware incorporated nonprofit as a foreign nonprofit in New York is $195. This consists of

  • $50 Delaware certificate of good standing fee (to prove to New York that the Delaware incorporated nonprofit is a corporation in good standing in Delaware)
  • $135 New York application for authority filing fee (to register the Delaware incorporated nonprofit as a foreign nonprofit in New York)
  • $10 New York certified copy fee

New York & Delaware Nonprofit Maintenance Costs

The minimum annual cost for maintaining a nonprofit’s corporate existence or foreign registration in New York is $0. This is because

  • 501(c)s may apply to be exempt from the New York State $25 minimum corporate franchise tax and $25 minimum New York City general corporation tax
  • Nonprofits may be exempt from the annual filings with the New York charities bureau and New York department of state (each with a minimum filing fee of $25), depending on their income or activities
  • A registered agent is not required so there is no registered agent renewal fee

The minimum annual cost for maintaining a nonprofit’s corporate existence or foreign registration in Delaware is $70. This consists of

  • $25 annual report filing fee
  • $45 registered agent fee (based on lowest cost commercial registered agent)

New York & Delaware Overall Cost Comparison

Based on the above

  • For a New York incorporated nonprofit to operate in New York, the minimum startup cost is $85 and minimum annual maintenance cost is $0
  • For a Delaware incorporated nonprofit operating in New York, the minimum startup cost is $379 (cost of Delaware incorporation plus New York foreign registration), and the minimum annual maintenance cost is $70(

So, compared with Delaware, New York is the best state of incorporation in terms of cost.


Home Team Advantage

A state sometimes explicitly or tacitly provides preferential treatment to domestic nonprofits (those incorporated in the state). This may be in relation to access to certain grants, or to applications for certain licenses and permits. This is certainly true with New York.

We’ve noticed that some New York government entities prefer New York nonprofits in terms of grants, licenses and permits. Certain government forms and applications do not even provide necessary instructions, guidance or checkboxes, with respect to foreign nonprofits.

So, compared with Delaware, New York is the best state of incorporation for a nonprofit that will depend on New York preferred grants, licenses or permits because of the home team advantage.


Reputation

Finally, there is a marketing value to a nonprofit’s state of incorporation. A state’s reputation carries with it connotations of culture and prestige.

Thanks to scandals such as the Panama Papers, some people have the impression that people incorporate in Delaware for sleazy reasons, despite the fact that most publicly listed companies are incorporated in Delaware. For this reason, Delaware nonprofits may face resistance from unsophisticated donors or potential partners.

Conversely, New York sounds sexy, especially for nonprofits in certain fields such as the arts, and some nonprofits like to say that they are “New York nonprofits.” Donors and potential partners who, for example, are patrons of the art, may find donating to or working with a New York nonprofit more attractive than a Delaware one.

So, compared with Delaware, New York has a slight advantage as the state of incorporation in terms of reputation.


Conclusion

Ultimately, there is no one-size-fits-all approach to choosing a state of incorporation. Generally, if cost is no object, it is better to incorporate a nonprofit in Delaware rather than New York due to the flexibility that Delaware’s corporate law offers (and the draconian restrictions that New York incorporated nonprofits are subject to). However, at times, a nonprofit may be engaged in certain activities, work in a certain space, or seek to attract certain stakeholders, where it may be prudent to incorporate in New York due either to New York government preferences for certain grants, licenses and permits, or to the reputational advantages that New York brings in certain fields.

This blog post is provided for general informational purposes only. It is not legal advice, and should not be a substitute for legal advice. If you have questions or comments about the post, or would like to learn more about something in the post, please feel free to contact me.

Additionally, you may be interested in taking a look at my New York nonprofit law services.

How to Start a Nonprofit Organization in New York

So you want to start a nonprofit in New York? Here is a step-by-step guide to forming a New York nonprofit organization

Welcome to our guide to starting a New York nonprofit organization. The purpose of this blog post is to provide a general overview about how to start a nonprofit organization under New York and federal (United States) law. There are many different types of nonprofit that you can form. These include 501(c)(3) charitable, educational or religious organizations, 501(c)(4) community welfare organizations, 501(c)(6) chambers of commerce, 501(c)(7) social clubs, 501(c)(10) lodge system fraternities and sororities and 527 political action committees, amongst others. If you are interested specifically in forming a New York 501(c)(3), it may be helpful please see our comprehensive guide to starting a New York 501(c)(3) nonprofit organization, which also includes free forms prepared by our firm for you to do so.
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501(c)(3) Nonprofit Types: Public Charity & Private Foundation Classification

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While most starting out in the nonprofit community are aware what 501(c)(3) means, many are unaware that there are different classifications, or types, of 501(c)(3) nonprofits. Specifically, there are two main 501(c)(3) nonprofit types: public charity or private foundation, each of which with their own subclassifications. In practice, the classification and subclassification of a 501(c)(3) is known as its “foundation status.”

Determining the foundation status of an organization is important because the type of a 501(c)(3) nonprofit dictates what a nonprofit can do, cannot do and must do. In general, being classified as a private foundation is less tax advantageous than being classified as a public charity. The purpose of this blog post is to provide an overview of the different foundation statuses available to a nonprofit.
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Nonprofit, NGO & 501(c)(3) – What’s the Difference?

Nonprofit, NGO & 501(c)(3) - What is the Difference?

“Nonprofit” or “Nonprofit Organization (NPO),” “Non-Governmental-Organization (NGO)” and 501(c)(3) are terms often used, in the United States, informally to describe the same thing: an organization exempt from taxation under section 501(c)(3) of the Internal Revenue Code (i.e. “501(c)(3)” organization). However, each of these terms actually has a different and specific meaning. In short, an “NGO” is a subset of a nonprofit, not every nonprofit or NGO is a 501(c)(3), and all 501(c)(3)s are nonprofits.
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How Many Directors are Needed on a 501(c)(3) Nonprofit Board?

We are often asked how many directors a nonprofit needs. The answer really depends on a variety of factors including where the nonprofit was incorporated, whether the nonprofit is a 501(c)(3) or other 501(c) organization, what kind of 501(c)(3) the nonprofit will be, and the identities of the directors. This blog post will answer many of the frequently asked questions about the composition of nonprofit and 501(c)(3) boards of directors.
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How to Start a New York 501(c)(3) Nonprofit NGO

Here is our comprehensive guide to starting a 501(c)(3) nonprofit NGO in New York. The path to 501(c)(3) can be overwhelming, involving review at both the federal (U.S.) and state levels. We hope this guide will be of help to you in navigating the complexities involved in the state process — incorporating a nonprofit NGO under New York law — and the federal process — being recognized as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (the U.S. tax law).
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Understanding the Most Favored Nation Clause

Your Most Favored Nation can Help or Hurt You. Learn about Most Favored Nation (MFN) clauses and how to use one for your business.

The “Most Favored Nation” or “MFN” clause, in business parlance, most often refers to a risk mitigating technique whereby a contracting party is guaranteed to get the best deal available, now and in the future. What it means is “we’ll enter into this deal now, but if I give a better deal to someone else, you’ll get the same deal.” Today’s post will discuss the application and crafting of a “Most Favored Nation” clause.
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How to Form a New York LLC

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Creating a New York Limited Liability Company (LLC) can be a challenge. This post explains step by step how to form an LLC under New York law. It is meant to assist those who want to form a New York LLC without a lawyer, accountant or online document preparation company, and provides the basic legal forms to do so.

While getting the appropriate legal support from a lawyer is always recommended, having a lawyer, accountant or online company help you form a NY LLC is not always necessary. Online companies essentially charge a few hundred dollars to help you fill out a form with your own input, plus a few hundred more for filing fees. Lawyers charge somewhat more, but are able to give legal advice and craft your New York LLC documents to your specific needs. However, cash is often tight for an entrepreneur embarking on a new enterprise, and some choose to go with an online company to save on cost. We understand and want to provide you the basic tools to form a NY LLC as cheaply as possible — by doing it yourself!
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Strengthening Copyright: Registration & Notice

Like Many Things in America, Copyright Protection can be Supersized. Learn how to upgrade U.S. copyright protection through copyright notices and registration.

The last post, “How do I get Copyright Protection?,” gave an overview of what is copyright, what can be copyrighted, and how you can obtain copyright protection in the United States and internationally. Most significantly, we discussed how you get copyright protection automatically for copyrightable stuff, and that copyright registration and copyright notices (e.g., using the © symbol) are not necessary to obtain copyright protection, but do confer benefits.

Today, as promised, we will discuss copyright notices and registration further. Specifically, this post will explain

  1. Why copyright notices and registrations are not necessary,
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  3. How to use a copyright notice,
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Your LLC or Corporation is a Shield that does not Break except in Limited Circumstances. Learn about the limited liability shield and how to protect it.

A corporation or Limited Liability Company (LLC) is a huge personal liability shield against the world. This is, perhaps, the main reason for a business owner to form a corporation (i.e. “incorporate”) or an LLC. Today’s post aims to describe what limited liability protection is about, why you may want it for your business, and some things to keep in mind to stay protected.

A brief history of the Corporation

The protection offered by a limited liability entity, such as a corporation or LLC, arises from the legal personality of the entity. The law recognizes these entities as “persons” separate from their owners. Just as one person generally cannot be held responsible for the actions of another, so too are owners of a corporation or LLC generally not responsible for what could be considered the entity’s “actions.” The concept of legal personality can be traced far back to ancient Rome.
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