As a business’ workforce grows and operations expand into other states across the nation, state-specific registrations and filings will result. Timely registrations and renewals are critical to secure the right to legally operate in each state and avoid costly fines and penalties assessed by state regulators for non-compliance.
Tovella Dowling represents national nonprofit, business, and social enterprise clients that operate and fundraise in multiple states.
Evaluating triggers to charitable solicitation and fundraising registrations is a fact-specific analysis that our attorneys frequently conduct for nonprofit clients to guarantee compliance and avoid unnecessary administrative filings, when possible.
When evaluating expansion into another state, whether it be to facilitate a new remote employee hire or roll out operations, or fundraising efforts, businesses, nonprofits, and social enterprises have several factors to consider.
Qualification to Transact Business as Foreign Entity
Depending upon the scope and type of operation in a particular state, entities should evaluate whether they must qualify with applicable state regulators. Foreign qualification is the process of formally registering to do business in a state other than its home state of incorporation. This applies to nonprofits, businesses, and social enterprises alike.
The threshold triggering obligations to qualify to transact business vary on a state-by-state basis and generally involve a fact-intensive analysis and evaluations of an entity’s particular connections to a given jurisdiction. Engaging in business operations in a state in which an organization failed to legally qualify can result in costly penalties and fees, as well as the risk of the state disallowing certain privileges afforded to other compliant businesses within the state.
Such privileges can include legal enforcement of contractual agreements with its residents or refusal of the nonprofit to engage in its state judicial process before gaining registration compliance. If required to register, the foreign qualification process generally involves an application process and annual renewal filings.
State Taxation and Reporting
Once qualified to transact business in a particular state, it should be evaluated whether that state imposes a state corporate tax.
In such cases, the business will generally be assessed a tax on all revenue derived from that state and incur a tax reporting and filing obligation with the applicable state taxing agency.
Nonprofit corporations will often qualify for a state tax exemption by completing a tax exemption application with the appropriate taxing agency.
Local Permits, Licenses, and Registrations
Finally, after addressing state qualification, taxation, and charitable solicitation registrations, a nonprofit doing business in states other than their state of incorporation should assess whether their operations within the state trigger the necessity for any local permits, licensures, or other registrations.
In addition to state taxation considerations, nonprofits doing business in states other than their state of incorporation must evaluate whether their conduct triggers an obligation to complete a fundraising registration with the applicable governing agency.
State Audit Requirement
Depending upon the type of activities engaged in by a nonprofit within a particular state, it may be required to obtain and file an independent audit report or audited financials with the applicable state governmental agency.
For this reason, a nonprofit must operate strategically and intentionally to ensure that its operations in a particular jurisdiction, or acceptance of a particular grant sourcing from a particular jurisdiction, justify the potential compliance obligations, such as an independent audit, that may come along with those activities. Importantly, independent audits can be costly and very time-consuming.
Our attorneys work with their nonprofit clients to ensure preparedness before conducting an audit and can work closely with the nonprofit’s chosen auditor to ensure the best possible results.
View All Practice Areas