Where were you born? For many people, that question leads to all sorts of interesting conversation, and the answer may carry important legal implications. For nonprofit organizations, they are “born” wherever the corporation was incorporated. The state of incorporation is sometimes where a nonprofit is still located, and sometimes far from where it now operates.
May the nonprofit’s state of incorporation change? Until recently, the answer for Illinois nonprofit corporations was “No.” But thanks to Illinois’ recently enacted “domestication” law, formally known as the Entity Omnibus Act, the answer is now “Yes.” Effective July 1, 2018, the new law allows nonprofit corporations to move their “place of birth” into or out of Illinois. That may be good news for certain nonprofits that have migrated here or elsewhere, particularly with respect to periodic state reporting requirements as well as other applicable state law.
Nonprofit Corporate Development - Staying Home
Most nonprofits start after a visioning process, with leadership development and goals for accomplishing a specific mission. Such plans lead to written articles of incorporation (or a corporate charter), setting forth the corporate name, initial directors, the articulated corporate purpose statement, and other key formation information. The articles are filed
filed with a state Secretary of State’s office (or comparable state agency). The nonprofit corporation is then officially “birthed” as a “legal person.” Generally, a nonprofit’s state of incorporation is wherever its initial leaders or programs are located, but some nonprofits strategically incorporate in other states.
When a corporation is created in a particular state, it is legally being organized under that state’s nonprofit or nonstock corporation act. The state’s nonprofit corporation statute thus defines what that corporation may and may not do legally, often in terms of default language (e.g., “unless the bylaws provide otherwise . . . ,”). The state’s nonprofit law covers all aspects including the corporate name, notices, voting, directors’ and officers’ fiduciary duties, the rights of members, mergers, dissolutions, and other significant corporate actions. State nonprofit laws generally have much in common, but some distinctive state-specific requirements definitely exist.
Absent domestication, the incorporation state’s law will continue to apply to the nonprofit regardless of whether nonprofit continues to conduct business in the state. For example, a nonprofit incorporated in Illinois but whose headquarters and entire operations are in Virginia, must still comply with the Illinois Not for Profit Corporation Act for the rules governing its corporation. The nonprofit must continue filing annual reports with the Illinois Secretary of State’s office. It would also be registered to do business in Virginia.
“Domestication” – Time to Move?
Previously, the only way for a nonprofit corporation to effectively “move” its corporate home state was to dissolve as a corporation, shift all its assets and liabilities to a newly formed corporate entity in another state, get a new EIN, and apply anew for IRS approval of the new nonprofit entity’s tax-exempt status. Cumbersome indeed!
A model nonprofit act was developed to address this issue, to allow nonprofit corporations to find a new home – that is, to “domesticate” - in another state. The State of Virginia took the lead in passing very favorable, comprehensive domestication legislation based on the model act. Other states have followed, now Illinois too. Illinois’ new Entity Omnibus Act covers both nonprofits and for-profit entities, and it allows corporations to both enter and leave Illinois. (See the full text of the Act here).
Should nonprofits proceed with domestication, and either leave or become Illinois corporations? As noted above, many corporations begin in one state, grow, and address issues of operating elsewhere simply by filing and maintaining registrations to do business in the newer states of operation. That is probably the simplest solution overall. For nonprofits seeking to officially move their home corporate status to or from Illinois, the following statutory considerations apply under the new Illinois domestication law.
Check Out the Other State First
Keep in mind that in order for a nonprofit from another state to domesticate in Illinois the law of that state must allow for domestication, and in order for an Illinois non-profit to domesticate outside of Illinois the “receiving state” must allow for domestication as well. While many states allow for domestication, many still do not. It is thus critical to evaluate the law of the other state involved before pursuing any domestication under the new Illinois law.
In addition to determining whether the state permits domestication, the nonprofit’s board should consider how the moving state’s statutory rules will impact the corporation. There are important differences between states’ nonprofit and nonstock corporation statutes that should be evaluated. For example, Illinois law limits the number of directors to a range of five (e.g., 3 to 8, 4 to 9, 5 to 10), while other states contain no such range limitations. A few other states allow for less than three directors (although that is not generally recommended).
The Illinois Process – No Luggage Required
Under the Illinois domestication law, the process is substantially the same – whether moving a nonprofit corporation into or out of the state. The nonprofit’s leaders must develop a written plan, get board approval for it, and then file a “statement of domestication” with the Illinois Secretary of State.
The written “plan of domestication” must contain the following information: the name and type of domesticating entity; the name and new jurisdiction of organization of the domesticated entity; the proposed new articles of incorporation (identified in the statute as “public organic document”); the full text of the proposed bylaws (identified in the statute as the “private organic rules”; other terms and conditions of domestication; and any other provisions required by Illinois law or the domesticating entity’s bylaws. The plan is thus a comprehensive document effectively restating the nonprofit’s corporate charter and governing bylaws, along with transition information. As noted below, it should also comply with applicable IRS requirements.
The plan must then be approved by the nonprofit organization, generally by the same process as if the organization were proceeding through a merger. Such steps may include appropriate notice, approval by the board of directors by the requisite majority vote, and approval by members too (if any). If the organization has members and its articles or bylaws do not specify a majority vote requirement, then the default two-thirds majority vote requirement will apply under the Illinois Act. Such approval should be reflected in a carefully prepared written corporate resolution, to be attached to the nonprofit’s meeting minutes.
Upon such corporate approval, the nonprofit must next file a signed statement of domestication with the Illinois Secretary of State. A statement of domestication must contain the following information: the current name, jurisdiction, and type of domesticating entity; the name and jurisdiction of the entity once it has been domesticated; the date and time on which the statement of domestication will become effective if not on the date of filing (cannot be more than 90 days after the filing date); and a statement that the plan of domestication was approved in accordance with the new law. Presumably, the Illinois Secretary of State will soon issue a form “statement of domestication” once the new law is effective. A copy of the nonprofit’s corporate resolution approving the domestication and reflecting its new articles of incorporation may be required too for such filing.
Living in a New State (and Tax-Exempt Too)
Following the domestication process under the new Illinois law, the domesticated nonprofit will be both organized under and subject to the law of its new jurisdiction. All property will continue to be vested in the entity without assignment, reversion, or impairment, and all liabilities follow the entity as well. It is thus advisable that anything concerning assets and liabilities are clearly outlined in the plan of domestication, to promote optimal clarity and smooth continuation of operations. All rights, privileges, immunities, powers, and purposes of the entity remain the same unless they have changed under this Act or through the entity’s plan of domestication.
The domesticated nonprofit will continue to operate in much the same manner as it always has without any interruption, after all the relevant domestication documents have been filed with the Illinois Secretary of State and compliance has been fulfilled with the other state’s domestication law. Since the corporation will be governed by the new state’s nonprofit law, a careful review of its bylaws is additionally warranted to ensure compliance with such newly applicable law.
With respect to the nonprofit’s federal tax-exempt status, that too should continue uninterrupted. As the IRS instructed in PLR201446025 (available online here) no new IRS tax-exemption application should be required for a nonprofit that proceeds through a corporate domestication under state law. The following five points are key to such continued tax-exempt status: (a) the nonprofit does not alter its basic organization form; (2) the nonprofit is effectively amending its original corporate formation document; (3) both states involved allow for nonprofit corporate domestication; (4) the nonprofit has not changed any liabilities as a result of the domestication; and (5) the nonprofit maintains its original incorporation date, as set forth in its original corporate formation document. Such information thus should be reflected in the nonprofit’s plan of domestication, in addition to specific state law requirements.
Is corporate domestication right for your nonprofit? As with any significant change, careful evaluation is always helpful, as well as careful development of accompanying documentation in compliance with applicable domestication law and the prospective new state’s nonprofit law. Overall, domestication may not be a compelling nonprofit governance matter, but rather a helpful clean-up project to update a nonprofit’s corporate status.
* Special thanks to Megan Vasquez, former intern at Wagenmaker & Oberly and May 2018 graduate of DePaul Law School, for her excellent assistance with developing this article.