With the New Year comes new beginnings. I’ve noticed one such new beginning recurring regularly in the New York nonprofit community. I call it “Moving Out of New York.” It happens elsewhere too of course, but wherever it occurs, it signals a change to an organization’s state of incorporation or a trust’s situs (the legal term for where it is established). While this might or might not include a physical change in the location of the organization’s office, it always entails legal changes to the organization.
The decision to change an organization’s state of incorporation or situs—which I’ll call the “home state” here for convenience—is driven by various factors. Often, organizations make the move because the organization no longer has a nexus to the home state. Officers and directors may have moved to other states; organizations may not maintain any office or employees in the home state; or the organization may conduct business from wherever the single paid employee resides. Organizations may move their headquarters to another state for a variety of reasons, including, for example, the high cost of operating in the home state.
While some organizations move when there is no longer an operational nexus within the original home state, many organizations decide from the outset to form in a state other than that in which the organization’s day-to-day activities take place. For example, many nonprofit corporations choose to incorporate in Delaware because of its corporate-friendly laws for both for-profits and nonprofits alike.
Now to be frank, the trend for organizations to move out of New York is often partially driven by New York’s nonprofit laws. Administered by the New York Attorney General’s Charities Bureau (“Charities Bureau”), the laws governing nonprofit governance and transactions in New York are complex and onerous in many ways. Although the recently adopted New York Nonprofit Revitalization Act has eased certain regulatory burdens for New York nonprofits, the remaining governance and regulatory compliance requirements still impose a significant burden, more so than in most states. This translates into significant delays and cost to nonprofits in maintaining their compliance within New York.
Moving out of New York does not always completely eliminate the state’s ability to regulate the organization, especially if the organization continues to conduct some activities in the State. But it does reduce the State’s jurisdictional nexus for regulating many, if not most, of the organization’s governance and corporate transactions. Consequently, organizations, particularly those that no longer maintain an operational nexus to New York, are increasingly moving to less burdensome domiciles.
Below are three different forms of moving out of New York, and the procedures each form requires:
1. New York Not-for-Profit Corporation to New State Corporation.
To change a New York not-for-profit corporation’s state of incorporation, the organization must:
- Incorporate a new entity in the target state;
- Obtain federal tax-exempt status for the new corporation; and
- Merge the New York corporation into the new corporation.
The two merging corporations must each comply with the legal requirements governing mergers in both New York and the target state. In New York, nonprofit mergers are subject to approval by the Charities Bureau. The members, if any, and the board of each corporation, must approve the transaction. As a final step, the New York corporation must close out its registration with the Charities Bureau. A variation of this option is for the New York not-for-profit to grant its assets to the new corporation and then dissolve. If the new corporation will hold property or assets, engage in charitable activities, or fundraise in New York, it may need to register with the Charities Bureau.
A few jurisdictions, such as Delaware, the District of Columbia, and Pennsylvania, permit organizations incorporated in those jurisdictions to convert their state of incorporation to another state without incorporating a new entity — a procedure knowing as “domesticating” or “redomesticating.” This permits an expedited option for corporations located in those states. Unfortunately, New York law does not permit domestication, necessitating the cumbersome moving process described here.
2. New York Charitable Trust to New State Charitable Trust.
Charitable trusts are formed in a particular state, but do not incorporate under the corporate laws of their home state. Trust instruments often designate both the situs of the trust, which is the state of the trust’s administration, as well as the state laws that will govern the trust—which may not be the same state. The courts of the situs state (and certain government agencies, such as the state Attorney General’s office) have oversight responsibility over the trust. Unless prohibited by the trust instrument, charitable trusts may transfer their situs to another state and the trust instrument may be amended to establish a new governing state law. A trust instrument could prohibit either kind of change, such that, for example, the situs may be transferred from New York to a new state while New York law remains the governing law. In that case, the courts in the new situs state would be required to interpret the trust instrument in accordance with the laws of New York. Transferring the situs of a trust generally requires court approval from both New York and the target state.
To transfer the situs of a New York charitable trust, the organization must undertake the following steps:
- Petition the court in the target state to assume jurisdiction over the trust.
- If the court in the target state agrees to assume jurisdiction, the trust must then petition the New York court, on notice to the Charities Bureau, to relinquish jurisdiction over the trust and direct that the situs of the trust be transferred to the target state.
- Following or simultaneous with these court approvals, the New York trust must file an informal accounting with the Charities Bureau.
If the charitable trust will no longer hold property or assets, engage in charitable activities, or fundraise in New York, the trust must close out its registration with the Charities Bureau.
3. New York Charitable Trust to New State Nonprofit Corporation.
Organizations originally formed as charitable trusts may choose to move to a new state as a nonprofit corporation, if such a change is not prohibited by the trust instrument. This change into corporate form has the benefit of providing the trustees with certain additional legal protections available through the state’s nonprofit corporation or general corporation laws.
To move a New York charitable trust to another state in the form of a corporation, the trust must:
- Incorporate in the target state;
- Obtain federal tax-exempt status for the new corporation;
- Obtain Charities Bureau approval to relinquish its oversight over the trust and transfer the assets to the new corporation by filing an informal accounting with the Charities Bureau; and
- Upon Charities Bureau approval, transfer the charitable trust’s assets to the new corporation.
The accounting must cover all of the years of the charitable trust’s existence, a requirement which can be difficult for older trusts. Depending on the language of the trust instrument, such a move may not be possible, or may only be possible following amendment of the trust instrument, if such amendment is permitted. If the charitable trust will no longer hold property or assets, engage in charitable activities, or fundraise, in New York, the trust will need to close out its registration with the Charities Bureau.
Moving is stressful, whether for persons or businesses. For nonprofits corporations and charitable trusts considering changing their home state, the long term benefits may in the long run be worth the cost.