A New York Practitioner’s Perspective
Most New York nonprofit practitioners vastly prefer forming corporations in Delaware over New York. We have even had clients ask after the fact about changing domicile from New York to Delaware. Although some states allow corporations to easily change domiciles, both the original domicile and the new domicile must allow for the change under their respective state laws. Although Delaware allows corporations to change domiciles, New York does not. Thus, a New York corporation seeking to redomicile in Delaware would have to form a Delaware corporation and merge the New York corporation into the Delaware corporation, with the Delaware entity surviving the merger. However, a merger of a New York charitable corporation into a foreign corporation requires approval by the New York Charities Bureau. The Charities Bureau generally will grant such approval if it is satisfied that the interests of the constituent corporations and the public interest will not be adversely affected by the merger. It is unclear, however, whether the Charities Bureau would approve the merger of a New York charitable corporation into a Delaware corporation simply for the purpose of changing venue.
Incorporation in Delaware is quick and painless, whereas the New York State Department of State regularly rejects certificates of incorporation, causing delays in incorporation as well as increased legal fees relating to time spent negotiating with the state and revising the language of the certificate. The New York Nonprofit Revitalization Act of 2013 enacted a number of changes designed to lessen these issues, but it is still much more of a trial to incorporate in New York than in Delaware. New York also has a variety of state governmental agencies (e.g., the Department of Education, Department of Health) from which consent to formation is required where the purposes of the corporation will bring the organization under such agencies’ jurisdiction. (In such a case, relevant agency consent is needed if the corporation were formed in Delaware and then applies for authority to conduct activities in New York, but at least the original incorporation would not be delayed, which can be important in terms of the retroactivity of the organization’s eventual tax exemption.) Amending an organization’s certificate of incorporation is also easier outside of New York, where changes to a charitable corporation’s corporate purposes must go through an attorney general approval process.
Another major difference between New York and Delaware is that Delaware does not have an attorney general with an active charity oversight function. Again, similar to (and in addition to) applying for authority in New York, Delaware nonprofits operating in New York still must register with the New York Charities Bureau, subjecting them to attorney general oversight (and rightly so), but foreign corporations are not subject to most of the New York Not-for-Profit Corporation Law provisions that are so burdensome to New York charities, such as the detailed and specific rules regarding conflict of interest policies, whistleblower policies, and investment policies. Another great example is dissolution—dissolving a New York not-for-profit corporation is a multistep task (one that, admittedly, was simplified by the recent New York Nonprofit Revitalization Act of 2013), involving the attorney general and the Department of Taxation and Finance in addition to the Department of State and any other state agencies with jurisdiction over the dissolving entity. In stark contrast, a nonprofit, nonstock Delaware corporation wishing to dissolve need only be up-to-date on its annual tax reports before the corporation may take a few relatively simple corporate actions to effect the dissolution. The time and cost difference between the two processes is remarkable.
Unless an organization must be a New York corporation for purposes of fundraising or interaction with New York-based institutions, there are very few reasons not to incorporate in Delaware. The main drawback is having to carry on two state compliance regimes, which primarily consists of filing the Delaware annual tax report and maintaining a corporate agent in Delaware (both of which carry a relatively small annual cost), in addition to filing the New York State registration and annual renewal. Delaware corporations also are required to have members, whereas New York charitable corporations are not (although other types of tax-exempt New York not-for-profit corporations do have to have members), but generally this does not impose a significant burden and can be satisfied by specifying in the bylaws that the board currently in place will serve as the members of the corporation.
A Word of Caution and Final Thoughts
A word to the wise: these advantages can cut both ways. For example, some complain that Delaware’s oversight of nonprofits is inadequate. The Delaware Attorney General’s Office Consumer Protection Unit is responsible for oversight of nonprofits and, although they are responsive, their oversight is complaint driven rather than active. Attempts have been made to pass a charitable solicitor registration act in Delaware, but it has not happened to date and is not on the horizon in the near future, the most recent bill having died in committee. On a more positive note, Delaware has mandated specific disclosure requirements for the solicitation of donations within the state: (1) the solicitor must identify themselves and the agency for which the funds are solicited; and (2) donors are entitled to question how the funds will be allocated between administrative costs and actual charitable use. Further, all state laws applicable to fraud and fraudulent transactions are required to be observed, and violations may result in civil or criminal prosecution. Another example of the need for caution is that the flexibility the Delaware statute, combined with the lack of active oversight, can have unintended consequences. For example, it can mean that a founder’s vision for a private foundation may be modified after his or her death or incapacity despite all intentions to the contrary. We have seen situations where, upon a founder’s death, the charitable purpose of a foundation was changed in ways that were technically legal, but not in keeping with its original intent and perhaps would not have been possible in a state with more restrictive governance and oversight, or given more foresight and awareness at the time of organization. Planning can mitigate this risk.
Cautionary tales have their place, but in many instances, the low administrative burden, lack of bureaucratic delay, ease of formation and amendment, flexible governance, and favorable tax treatment make Delaware an advantageous choice for nonprofit formation and one well worth considering.