Time to Move?: Changes in a Nonprofit’s Domicile

It’s nearly the end of the semester and quickly closing in on exam time, which means I need to finish writing my exam for Secured Transactions (please don’t ask me why I also teach this unfortunate subject). In Secured Transactions, we spend some time discussing how organizational debtors can change locations and the impact this has on their creditors’ perfection. Reviewing these concepts as I drafted my exam, I began to wonder how easy it is for nonprofits to change locations. And down the rabbit hole I went, because anything beats exam writing. So, come along with me on this not-particularly-academic-yet-practical post on nonprofit domicile changes.

Why Change Domiciles?

First, you may be wondering why a nonprofit would change its domicile, as such a change could come with a nontrivial price tag. I wondered the same thing, but it turns out that there are compelling reasons and considerations in re-domiciling nonprofits. You probably already know that nonprofits are considered legally domiciled in their state of incorporation, which dictates governing laws, regulatory requirements, liability protections, state-specific tax exemptions, etc. But over time, as a nonprofit organization’s needs evolve, it may be beneficial for a nonprofit to re-assess its state of incorporation.

When a nonprofit’s main office or programs move, it may make sense to align its legal domicile with the new operating base. But in addition, because compliance requirements carry costs and can vary significantly by state, it may make sense for a nonprofit to relocate its domicile to avail itself of friendlier governance rules and compliance regimes. Certain states offer more favorable governance laws for nonprofits, simplifying board requirements and regulatory burdens. Thus, a move to a more nonprofit-friendly jurisdiction can make compliance easier and more predictable. For more on state governance requirements, read here (Hint: Delaware makes things easy.).

But then there’s the business realities of running a nonprofit, which include taxes. Several states (e.g., AK, FL, NV, NH, SD, TN, TX, WA, and WY) have no state income tax, making them favorable domiciles for the employees of nonprofits. But beyond that, states vary on their exemptions of nonprofits from real estate taxes, the reduction of which could lower operational costs. Most states seem to permit charities—whether statutorily or judicially (e.g., OH and PA) defined—to avoid this type of taxation, which could be a boon to nonprofits fitting these definitions. Yet, as far as I can tell, there’s been no systematic study of state tax climates on nonprofits, so the above discussion is the best I can muster.

How to Change Domicile

With the disclaimer that none of this is legal advice, I’m sharing what I’ve read about how nonprofits can change domicile. Nonprofits have two primary methods for changing domicile: statutory domestication and merger.

1. Statutory Domestication: A small number of states permit nonprofits to change domicile through statutory domestication, allowing the organization to transfer incorporation to a new state while maintaining its legal identity. However, both the original domicile and the new domicile have to recognize statutory domestication to pull this off. This process involves submitting paperwork to the state’s corporations office (usually the Secretary of State) in both the originally domiciled state and the new state. It used to be the case that the entity would have to reapply with the IRS to keep its tax-exempt status, but it appears that that practice has been discontinued.
2. Merger: By contrast, in states that do not allow statutory domestication, a nonprofit can create a new entity in the target state and merge the original organization into it. This method is more complex and requires dissolving the original entity while transferring assets and obligations to the new one.

So, whether via domestication or merger, nonprofits considering a new domicile should hire an attorney, because either process often involves notification and compliance with state-specific corporate filing requirements.

Is the Juice Worth the Squeeze?

Just like changing residences, moving domiciles can be costly to nonprofits. But in the long term, nonprofits may see some benefit from relocation. For one, the scope of programs provided by the nonprofit may demand relocation. If so, collocating operations to be proximal to the provision of the services the nonprofit offers may be worthwhile. For another, the prospect of lowering operational (and compliance) costs may be a driver of relocation. However, there’s an alternative I’d like to discuss in closing.

The Foreign Qualification

In many cases, nonprofits can maintain their original domicile while expanding operations to another state through foreign qualification. This process essentially allows the nonprofit to register to conduct operations in another state without having to change its domicile. Here again, foreign qualification registration requirements vary by state. But it could afford nonprofits a less costly path to expanding their impact without having to seek a new domicile.

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law