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Where to Start a Nonprofit

October 18, 2011

If you can incorporate anywhere in the U.S., how do you choose a state? How does rural/urban status impact the choice? Help MizInfo build a checklist!

Lately I’ve been advising several start-up nonprofits. I know, I know, there are good reasons to NOT form a nonprofit. Believe me, I put these groups through the wringer (kindly) to be sure “nonprofit” is the best organizational choice for them. But once these outrageous community-builders have decided, “yes, a nonprofit corporation is the best vehicle to achieve our vision of community change,” some have the opportunity to choose a home state.

Most nonprofits incorporate close to their founders or clients. Other nonprofits can do their work from anywhere, and go to their clients online or in person. Today a colleague here in Washington State asked, “Is it better to incorporate here, or in Montana, where my founding partner is located?” After searching around a bit, I found there are many great guides on how to start a nonprofit (501Commons’ is one of MizInfo’s faves), but I didn’t find a good guide to how to choose between states when incorporating.

Can you help? What would you add to my list of considerations?

Cost of doing business:

Incorporation filing fees: Check each Secretary of State’s corporations division to see how much it costs to incorporate. It’s usually nominal, like $30-$50, plus additional fees if you want it expedited, or to add additional DBAs (doing business as, i.e. multiple names for the organization or to include program names as corporate names).

Taxes: Check each state’s Department of Revenue on what types of taxes you will have to file. When a state gives an organization nonprofit status, it may be eligible for certain benefits, such as state sales, property and income tax exemptions. It’s a changing landscape now, with states and even some cities and counties so low on revenue that they are revoking some tax exemptions for nonprofits, or adding additional fees. (For example, just yesterday a Washington State law was enacted that makes sports- and recreation-type nonprofits now have to pay taxes on event and participation fees, which could hit community-based leagues, YMCAs, etc.) Compare business and occupation taxes in each state (B&O). Also check for your local city or county taxes. If you will be conducting business in other states, you may have to also register with the Department of Revenue in those states and pay taxes there.

Business regulations that may increase your cost of doing business: Depending on the size of your organization and number of employees, employment regulations vary from jurisdiction to jurisdiction (not just state to state, but also city to city). For example, Seattle just passed a law requiring businesses of a certain size to provide paid sick leave for all staff, including hourly employees. How will these types of fees in each location impact your cost of doing business?

Insurance and other liability costs: How much difference is there from state to state in Director & Officers’ insurance, property insurance, insurance for the organization’s vehicles, professional liability insurance, etc.? Costs can vary widely based on geography. For example, it’s often costlier in more rural areas, because the liability pool is smaller.

Regulations within your field of work, or other administrative hassles: There may be state agencies that regulate your work (i.e. related to working with kids/seniors/other vulnerable populations; working on public lands; historic preservation; health; etc.). Regulations within fields of work vary greatly from state to state. This may not mean more fees, but could mean different or more permits, reporting paperwork, professional accreditation requirements, audits, etc. Some regulations are good, keeping people and public resources safe, but at least consider how the “hassle factor” equates to time, which equates to money.

Relationship considerations: If it’s essentially the same cost for doing business in each state, you may want to research things such as:

Networks & capacity-building: Are most of your partners or clients in one state or the other? Are there benefits of having similar networks, resources or regulatory structures as your clients or partners? Are there associations for your field of work? What are the nonprofit support networks like in each state? For example, the Big Sky Institute has been helping Montana nonprofits for more than 10 years, while Washington Nonprofits is just getting started (with great promise!), but based on population Washington State may have more experienced nonprofit consultants, accountants, etc.

Governance and staffing: Where are your board members located? How will the organization’s location impact the board’s ability to perform their legal and functional duties? How will it impact individual board members’ support responsibilities, such as assisting with fund development, participation in oversight committees, etc.? For each location, what considerations need to be taken for staff and volunteers in workspace, communication with leadership, supervision, safety, etc.? If you don’t plan to grow quickly and have staff right away, at least consider how the organization’s location may impact possible staffing issues in the future: Can you find the volunteer or professional expertise you need?

Advocacy: Geography greatly impacts opportunities to influence local, state, federal and international policies. If you plan to do any type of advocacy work, consider how residency in different states impacts your access to lawmakers, coalitions of like purpose, etc. For example, in more rural states it can be easier to get face-to-face meetings with state and Federal representatives than it is in more populated states. When I was advocating for human rights and women’s issues in Wyoming (population 500,000), I could get a meeting with one of our senators in DC or in-state nearly any time I asked, while colleagues in more populated states never got beyond their senators’ 22-year-old legislative aides. However, if you work in coalition, would it be better to locate where they already have influence on state or federal policy and funding choices?

Fund development considerations: What will be your main sources of income? While a nonprofit’s funding portfolio varies widely based on its field of work, below I note which sources are most and least common for the nonprofit sector as a whole.

Fee-for-service: If you are providing a service or product, do your clients (whether individuals, businesses, etc.) care where you are based? Is the cost of producing your goods or service impacted by distance to clients (shipping costs, local average cost to rent meeting space, etc.). Do the state or local jurisdictions regulate or tax nonprofits organizations’ fee-based income?

Contracts: If most of your income is from contracts with other institutions, it may matter where you are based. For example, most academic researchers based at universities could care less where their contractor’s business is located, as long as they are the best outfit for the job. But some state agencies are mandated to contract in-state (or mandated to attempt in-state contracting before opening an RFP to out-of-state organizations). Note: Nationally, the greatest share of nonprofits’ income comes from grants and contracts from governments.

Members: If you will be founding a membership organization, do members care where the organization is located? Are there benefits associated with either location in terms of your ability to cultivate, recruit, service, and recognize members?

Annual fund: If you plan to solicit individual donations, where are most of your donors located? It is far easier to cultivate donors if you are close enough to have special events, recognitions, and meet face-to-face. This is especially true if you plan to develop major donors or endowments in the future. However, if you prefer, just add travel expenses and staff time to the “Cost of doing business” calculation, and then distance is less of an issue (but it increases the total amount of $ you have to raise). Note: Nationally, individual donations are the second-most-common funding source for nonprofits.

Grants: When it comes to researching, writing and getting grants, the state where your organization is incorporated matters a great deal. As a rule, the more rural a state, the fewer the grant resources.* Many corporate, family, and community foundation grants are restricted by field of work AND geography. Sometimes they are limited by the geography of the client population or project; sometimes the nonprofit’s location; and sometimes both. If you don’t plan to seek many grants, this isn’t such an issue. Or, your location may not matter if the nonprofit will have a big enough budget and will be working in a specific field that attracts grants from the bigger national foundations. Note: Nationally, grants are one of the smallest sources of overall nonprofit funding.

(*Aside: For a good primer on the “philanthropic divide,” check out the Big Sky Institute for Nonprofits. My colleague Mike Scheckman in Helena was one of the first to coin the term back 2000, and it’s caught on. In a nutshell, rural industries did not develop generational wealth as did urban industrial areas, therefore there is less regional philanthropy in rural America. There has been progress in the last ten years, with even smaller family foundations such as Medina initiating rural funding strategies. But there is still a long way to go to achieve rural funding equality. For more info, follow the work of groups such as the National Rural Funders Collaborative, and the Rural Philanthropy Network.)

What’s missing? In the comments, add to or modify my suggestions! How would you choose a state for incorporating a nonprofit?

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