If your nonprofit solicits charitable contributions in a state that requires registration and it doesn't fall within an exemption, then you must register with the applicable state agency—typically, the secretary of state or state attorney general. It is imperative for your nonprofit to comply with state registration laws. If you don’t, you risk unwanted attention and scrutiny from the IRS and states, fines, and potential problems with donors.
In the past, the IRS did not ask for information from nonprofits about whether they were in compliance with state registration requirements or what states they were registered in. However, this changed in 2007 when the IRS adopted new, radically different Forms 990 and 990-EZ. These are the annual information returns that nonprofits file each year with the IRS. Both of these forms now require nonprofits to provide information to the IRS about their state registration. Thus, nonprofits need to pay attention to state registration requirements in order to properly complete their annual IRS information returns.
All but 11 states have laws requiring nonprofits to register before soliciting in their state. If you don’t register (or renew your registration) in a state where you are required to, you are breaking that state’s law and you could be subject to fines and other penalties. These fines can be substantial, often in the thousands of dollars. Unlike many other debts and liabilities of a nonprofit, your board of directors can be held personally liable for these fines. Many state solicitation laws provide that a nonprofit cannot reimburse its directors, officers, or employees for such fines.
However, your nonprofit’s problems with states in which it has failed to register won’t necessarily end with fines. In addition, the state may order your nonprofit to cease soliciting donations within the state until you have registered there. And, in extreme cases, the state may revoke your nonprofit’s state tax exemption. This means it will have to pay state income and property taxes. Ouch!
Foundations, government agencies, and other sophisticated funders know about state registration requirements. Any of them may ask you whether you have properly registered in the states where you are raising funds and may even want proof of it. Not complying with state registration laws may make your nonprofit look like an amateurish operation that doesn’t deserve funding.
It also won’t look good for less sophisticated donors if it gets out publicly that your organization has broken the law by failing to comply with state registration laws. Some states are posting the names of nonprofits that fail to register on the Internet.
Professional fundraisers may also refuse to work with you unless your nonprofit is property registered in all the states in which it solicits donations.
Financial auditors also are increasingly aware of state registration requirements. They may require that your nonprofit register or mention that it has not done so in their audit reports.
Legally speaking, your nonprofit does not have the right to solicit contributions in any of the 39 states that require registration until it has, in fact, registered. Any contribution you solicited and received while you were not registered is in legal jeopardy. If a court determines that your nonprofit failed to register, it can order that it make restitution—that is, give back any of the contributions it received during that time. If a donor—or, perhaps the heir of a donor who made a large gift by will—discovers that you failed to register, that person could bring a court action to get back or set aside the gift. This has actually happened.
For a complete guide to the fundraising registration process, including information on how to do it own your own, refer to Nonprofit Fundraising Registration: Nolo’s State-by-State Digital Guide (updated quarterly).