The question people get wrong
“Where should I incorporate?” matters much less than “where will I be doing business?” Federal tax exemption is national — a c3 is a c3 whether it was formed in Delaware or Wyoming. What varies by state is:
- Formation and annual filing cost, plus franchise tax.
- Corporate/nonprofit law quality — how predictable the courts are.
- Charitable solicitation registration — required in ~40 states if you fundraise there, and largely independent of where you incorporated.
- Board composition rules for nonprofits.
- State tax exemptions (income, sales, property) which must be applied for separately from the IRS.
Foreign qualification is the trap. If you form in Delaware but your office and staff are in New York, you must also register in New York as a foreign corporation and pay both states’ fees forever. For a small nonprofit that is pure overhead with no benefit. Nonprofits should almost always incorporate in the state where they actually operate. Delaware’s advantages are written for venture-backed companies with shareholder litigation risk, which a charity does not have.
For-profits
| State | Why people choose it | Watch out for |
|---|---|---|
| Delaware | The default for anything taking outside investment. Deep case law, Court of Chancery, every investor doc assumes it, PBC statute is mature. | Franchise tax can surprise you if you authorise millions of shares — use the assumed-par-value method. You still register and pay wherever you operate. |
| Wyoming / Nevada | Low fees, no state income tax, strong privacy. Fine for a solo LLC. | The “no state tax” pitch is mostly marketing — you’re taxed where you have nexus, not where you filed. Investors dislike them. Nevada’s total cost is higher than advertised once the business licence is counted. |
| Texas / Florida / Washington / Tennessee | No personal income tax; good if founders live there. | Texas has a franchise/margin tax; Washington has B&O tax on gross receipts, which hits pre-profit companies. |
| California | Where the talent and customers often are. | $800 minimum franchise tax on essentially every entity, every year, regardless of income. Aggressive about asserting nexus over out-of-state entities with CA staff. |
| New York | Same logic — be where you operate. | Publication requirement for LLCs (newspaper notices) is a real, non-trivial cost in NYC counties. |
Nonprofits (c3 and c6)
| State | Character | Notes |
|---|---|---|
| Delaware | Cheap and simple to form; nonprofits are non-stock corporations. | No charitable-solicitation registration of its own, but that saves nothing if you fundraise elsewhere. Little reason to use unless you’re already there. |
| New York | Rigorous. Modernised by the Nonprofit Revitalization Act. | Some purposes require consent from a state agency (education → Board of Regents) before the SoS will file, which adds months. AG Charities Bureau registration and audit thresholds tied to revenue. Strong credibility signal. |
| California | Well-developed nonprofit law; large funder ecosystem. | Registry of Charities (Form CT-1, then RRF-1 annually). No more than 49% of directors may be “interested persons” — the tightest board-composition rule in the country. $800 franchise tax applies until state exemption (Form 3500/3500A) is granted. |
| Massachusetts | Credible for research and education orgs; university-dense. | AG registration plus annual Form PC; audit thresholds. |
| Washington, DC | Right choice if your work is federal policy. | Proximity is the whole argument; two-year biennial report cycle. |
| Texas | Low cost, fast, light-touch. | Nonprofits exempt from franchise tax once approved by the Comptroller. Fewer institutional funders locally. |
| Illinois / Pennsylvania / Colorado / Minnesota | Middle of the road: reasonable fees, active philanthropic sectors. | Colorado is notably cheap and fully online. |
| Wyoming / Nevada / South Dakota | Cheapest formation. | Essentially no upside for a charity — no local funders, and you’ll foreign-qualify anyway. Can look evasive to grantmakers. |
Board minimums
- Most states allow one director; several require three (California effectively expects three for a public charity, and a c3 with a one-person board will struggle with the IRS and with every funder regardless of state law).
- Assume three unrelated directors as the practical floor for a c3. Funders, auditors and the Form 990 governance section all key off independence.
Charitable solicitation registration
Separate from incorporation and from IRS exemption. Roughly 40 states plus DC require registration before you ask their residents for money — and “asking” includes a Donate button on a public website under most states’ reading. The Unified Registration Statement is only partially accepted; several large states (including New York and California) run their own systems. Budget for a compliance service if you fundraise nationally.
Practical recommendation
- Incorporate where your principal office and staff are. One state, one set of filings.
- Exception: you are raising venture capital → Delaware C-corp or PBC, and foreign-qualify at home.
- Exception: federal policy is the core of the work → consider DC.
- Ignore the Wyoming/Nevada pitch unless you are a single-member LLC with no employees and no physical presence anywhere else.
Fees and thresholds change annually. Verify current numbers with the Secretary of State and Attorney General for your chosen state before filing — see sources.md and costs-and-filings.md.