True or False? A nonprofit fundraising nationally must register to do business in every state.
If you are uncertain about the answer to the above question, then you are in good company. Many nonprofit executives and professionals representing them (CPAs, attorneys, fundraisers, etc.) oftentimes do not fully understand what is required. Other questions nonprofit professionals can find perplexing include:
- Does charitable fundraising constitute doing business in a state and, if so, where do we need to register?
- Our nonprofit is about to enter into a charitable sales promotion with a commercial coventurer. In which states are we required to register?
- Our Development Director just engaged a fundraising professional to solicit charitable donations nationwide. Where do we need to register?
The common thread in these questions is “register.” What is required and, most importantly, where? It’s imperative to understand the correct answers, as mistakes in this process can be quite costly. For example, a nonprofit recently described a disaster to me, whereby its prior registered agent qualified it to conduct business nationwide, when what was actually needed was nationwide charitable solicitation registration. This was a terribly expensive mistake to unwind, as the nonprofit needed to file corporate withdrawal filings in nearly every state and then file initial charitable registration statements instead, in addition to paying the original corporate qualification fees. Registering to do business in a state is not the same as registering to solicit charitable donations, so it’s important for charities to differentiate between these two potential state filing requirements.
Conducting Business, Registering to Do Business, Corporate Qualification
What constitutes doing business in a state is not clearly defined in the state statutes and usually requires the guidance and assistance of an attorney. Generally speaking, a nonprofit is considered to be conducting business in a state if it has sufficient nexus (or connection) to a state, such as opening an office, hiring employees and other activities that would constitute an ongoing business operation. In these cases, most states will require nonprofits to file an Application for Certificate of Authority (or similarly named form) with the corporations division of the Secretary of State, which is commonly referred to as “corporate qualification” or “qualifying to conduct or transact business” in a state as a foreign nonprofit corporation. (“Foreign,” in this case, means a nonprofit incorporated in another state or country, while conducting business in a state.)
Charitable Solicitation and Fundraising Registration
In most states (absent any other nexus with the state) soliciting charitable donations, regardless of the method (e.g. mail, phone, e-mail, social media and online, charitable sales promotion, radio, TV, etc.), does not constitute doing business in a state. Therefore, corporate qualification is usually not required, but rather charitable solicitation registration is in most states (currently 39 states and D.C.), absent any applicable charitable solicitation registration exemption for certain types of nonprofits. Of course, there are a handful of notable exceptions, such as California and Colorado, where solicitation of donations is considered as doing business and, therefore, both corporate qualification and charitable registration are required prior to soliciting donations. Yet California and Colorado do not require qualification as a prerequisite for charitable solicitation registration so, technically, it’s possible to register to solicit without registering to do business in these states. This is contrasted by D.C. and North Dakota, which require corporate qualification as a prerequisite to obtaining a license to solicit charitable donations (i.e. charitable solicitation registration). For more information on nationwide charitable registration for nonprofits, see our previous blog post, “Charitable Solicitation Registration, Renewal and Compliance: Required Filings and the Consequences of Failing to Comply”. Also, when qualifying to do business in a state, note that there are usually ongoing compliance and other matters to consider.
Corporate Compliance and State Tax Exemption
In California, qualifying to conduct business in the state will trigger a notice to the California Franchise Tax Board (“FTB”), which will require a tax exemption filing with its office (California Form 3500A – Submission of Exemption Request). Failure to file this form can, and often does, result in a nonprofit qualified in California, but not recognized by the FTB as tax exempt, being treated as a taxable entity. After the tax exemption is filed, the FTB then requires an annual filing (California Form 199 – California Exempt Organization Annual Information Return) to maintain good standing with the FTB. Similarly, the California Secretary of State, where the corporate qualification is filed, requires an annual Statement of Information (Form SI-100) to maintain the foreign nonprofit corporate good standing. Fortunately, this is somewhat unique to California and, to some extent, D.C. D.C. also requires a tax exemption filing at the Office of Tax and Revenue (Form FR-164 – Application for Exemption) but, unlike California, does not require an annual tax filing. The corporate compliance form is required biennially at the D.C. Department of Consumer & Regulatory Affairs (Form BRA-25 - Two-Year Report for Domestic and Foreign Filing Entity), not annually. As for Colorado and North Dakota, no tax filing is required, but an annual corporate report, in order to maintain good standing, is required. For more information on nationwide corporate compliance filings for nonprofits, see our previous blog post, “Nonprofit Corporate Compliance: Required Annual and Periodic Reports and the Consequences of Failing to Comply”.
Answers and Final Thoughts
In an effort to directly answer those persistent questions posed at the start of this post, I offer the following:
Does charitable fundraising constitute doing business in a state and, if so, where do we need to register?
Answer: Usually not, but California, Colorado, Nevada and Oregon are exceptions and qualification will be needed in D.C. and North Dakota prior to charitable registration. A careful review of state statutes is recommended to ensure compliance.
Our nonprofit is about to enter into a charitable sales promotion with a commercial coventurer. In which states are we required to register?
Answer: The answer to this question varies from state to state depending on the scope of the sales promotion. You will usually need to register to solicit and/or conduct business in the states where the promotion is conducted.
Our Development Director just engaged a fundraising professional to solicit charitable donations nationwide. Where do we need to register for charitable solicitation? Answer: Currently, 36 states and D.C. broadly require charitable solicitation registration and renewal, unless a specific exemption applies. The following states do not require charitable registration: Arizona, Delaware, Iowa, Idaho, Indiana, Montana, Nebraska, Nevada, South Dakota, Vermont and Wyoming. Nevada, however, amended its corporate statute (effective 1/1/2014) and now requires nonprofits soliciting in the state to qualify as a foreign corporation and file a Charitable Solicitation Registration Statement form with the corporate filing. (Nevada does not have a charitable solicitation act, so the requirement to file this charitable solicitation registration form with the corporate filing is a bit unusual.) Also, Texas has a limited registration requirement that is only applicable to law enforcement, public safety and veterans organizations. Finally, Louisiana only requires registration if you engage paid, professional solicitors to fundraise in the state, while Missouri exempts 501c3 organizations upon application.
And finally, our true/false question:
True or False? A nonprofit fundraising nationally must register to do business in every state.
Answer: False. As you can start to see from the above, the answers are not definitively “yes” or “no,” and they depend on other factors. In some states, not only is corporate qualification required, but charitable solicitation registration is also required, whereas in others neither is required. The corporate and charitable solicitation statutes and requirements vary by state as well as type of nonprofit and depend on activities and nexus with a state, among other things. Unless you are prepared to spend a large amount of time on charitable registration and corporate qualification due diligence, it’s in your best interest to engage counsel or the services of a competent service company to guide you through the myriad requirements of corporate qualification and charitable registration.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
