F. Incorporating in Another State -- Don't Fall for It

Corporations formed in a particular state are known in that state as domestic corporations. When viewed from outside that state, these corporations are considered foreign. A foreign corporation that plans to engage in a regular or repeated pattern of activity in another state must qualify to do business there by obtaining a certificate of authority from the secretary of state. For example, a corporation formed in Nevada that intends to do regular business in California is a foreign corporation here, and must qualify the corporation with our secretary of state.

Incorporators who plan to operate in another state besides California have naturally considered whether it makes sense to incorporate in that other state. Maybe the incorporation fees or corporate taxes are lower than those in California or the nonprofit statutes are more flexible. Then, the reasoning goes, one could qualify the corporation in California as a foreign corporation. As tempting as this end run may appear, it's not usually worth it. This section explains why, and also advises you of out-of-state activities that you can engage in without worrying about qualifying in another state.

Qualifying as a Foreign Corporation in California Will Cost You More

The process of qualifying a foreign corporation to operate in California takes about as much time and expense as incorporating a domestic corporation. This means that you will pay more to incorporate out-of-state since you must pay the regular California qualification fees plus out-of-state incorporation fees.

Two Sets of Tax Exemptions

Your corporation will still be subject to taxation in each state in which it earns or derives income or funds. If the state of incorporation imposes a corporate income tax, then the nonprofit corporation will need to file for and obtain two state corporate tax exemptions -- one for California, the state where the corporation will be active, and one for the state of incorporation. Similarly, double sales, property, and other state tax exemptions may often be necessary or appropriate.

Two Sets of State Laws

Your out-of-state corporation will still be subject to many of the laws that affect corporations in California. Many of California's corporate statutes that apply to domestic corporations also apply to foreign corporations.

Out-of-State Activities Below the Radar

For the above reasons, most readers who flirt with the idea of incorporating in a state other than California would be well advised to skip it. This doesn't mean, however, that you'll have to trim all of your activities to stay within California. Fortunately, there are many things nonprofits can do as a foreign corporation in another state without obtaining a certificate of authority from the secretary of that state. Here are some that are recognized in many (but not all) states:

• maintaining, defending, or settling any legal action or administrative proceeding, including securing or collecting debts, and enforcing property rights
• holding meetings of corporate directors or of the membership and distributing information to members
• maintaining bank accounts and making grants of funds
• making sales through independent contractors and engaging in interstate or foreign commerce
• conducting a so-called isolated transaction that is completed within 30 days and is not one of a series of similar transactions, and
• exercising powers as an executor, administrator, or trustee, so long as none of the activities required of the position amounts to transacting business.

When Out-of-State Incorporation Makes Sense

There may be a few of you for whom incorporation in another state makes sense. If you plan to set up a multistate nonprofit with corporate offices and activities in more than one state (a tristate environmental fund for example), you may want to consider incorporating in the state that offers the greatest legal, tax, and practical advantages. To help you decide where to incorporate, you can refer to How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo). This book contains the basic nonprofit corporation law for each state. For further information on state-by-state differences, check a local nonprofit resource center library (for nonprofit library resources online, type "nonprofit resource libraries" into your search engine -- you'll find a host of online libraries at your disposal). An experienced nonprofit lawyer or consultant can also help you determine which state is the most convenient and least costly to use as the legal home for your new nonprofit corporation.

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