In addition to interpersonal skills, helming an organization requires preparation for the administrative side of leadership as well, like knowing what to expect when expanding the organization to a new state. Dr. Stephen Urich has 25 years of experience in the nonprofit sector and in his role as the CEO of Labyrinth, Inc., assists charitable organizations with all aspects of charity state registration and compliance. Since CLG serves leaders in nonprofits and business leaders on nonprofit boards, we’ve asked them to lay out his guidance for embarking on nonprofit expansions.
For many organizations that have successfully navigated 2020’s challenges, it’s time to look ahead to the future. Simultaneous surges in both support and community as a result of the pandemic have put many nonprofits on the cusp of growth. Leading your mission through change is never easy, but it’s definitely do-able—and it’s essential for taking your impact to the next level. For some nonprofits, this means expanding fundraising to multiple states.
Growing your nonprofit’s footprint is extremely exciting. You’ll reach wider audiences and grow your on-the-ground impact in all kinds of new ways. But never let the excitement overshadow the logistical necessities that come with multi-state operations.
Due diligence involves understanding and staying on top of all the legal and regulatory requirements that you’ll be expected to comply with in multiple jurisdictions.
If your nonprofit is expanding outside of its home state for the first time, the compliance landscape can be intimidating. You’ve already learned the essentials for operating in your home state, but rules and regulations can vary drastically across borders. Plus, keeping track of all the moving pieces can easily become overwhelming. How do you know where to start?
We’ve got you covered. Here are a few of the most important compliance elements to keep in mind when it comes to multi-state nonprofit expansions:
- Understand the regulatory landscape
- File for charitable solicitation registration
- Keep an organized renewals calendar
- Appoint on-the-ground registered agents
You’ve worked hard to steer your nonprofit this far. Compliance is a critical part of safeguarding all of that hard work and the progress your team has made. After all, your mission matters, so you must proactively take steps to ensure you can continually pursue it without legal and logistical concerns slowing you down. Let’s dive in.
1. Understand the regulatory landscape
Start by getting a solid grasp on the regulatory landscape as a whole. At the federal level, nonprofit compliance is relatively straightforward—receive 501(c)(3) status from the IRS and then keep up with filing and publishing your Form 990s, public disclosures, and/or additional financial audits each year. However, state-level rules and regulations can be much more complex.
Each state has its own unique set of requirements that you’ll need to understand in order to keep your nonprofit safe and your donors confident in your stewardship abilities.
Specific nonprofit state filing requirements and rules vary between jurisdictions, but there are a few key compliance areas to keep in mind:
- Charitable solicitation registration. You need to register with most state governments before you can legally solicit donations from their residents. You (hopefully) already keep up your registration renewals in your home state, but you’ll need to do so in any new states, too. We’ll dig into the solicitation registration process in the next section.
- Corporate filing requirements. You’ll also need to register to conduct business in some states. The corporate filing process involves appointing registered agents in those jurisdictions, which we’ll discuss below in Section 4.
- Financial reporting requirements. As part of the solicitation registration and renewal process, you’ll typically be required to provide at least your most recent Form 990 to relevant state governments. However, many states have additional requirements for other reviewed or audited financial reports, so be prepared if you’ll need outside help to complete them on time.
- State tax exemption requirements. In most states, you’re automatically exempt from income taxes as a federally-recognized 501(c)(3). However, you will need to carefully consider how unrelated business income taxes (UBIT) and state-level sales tax exemptions are handled in different jurisdictions—the exact rules and definitions can vary from state to state.
These ongoing elements of nonprofit compliance are all in addition to other regulations that you may need to keep in mind as you roll out programming or events in new states.
For instance, for on-the-ground events, consider any state or local laws regulating games of chance or that relate to COVID-19 mandates and capacity guidelines. If you’ll kick-off your expansion with events, do plenty of research to adapt your plans accordingly, invest in waiver tools, set attendance caps, and/or obtain the proper licenses.
And don’t forget about online fundraising! Many organizations have expanded their online reach during the pandemic. It’s important to remember that if you accept online donations from residents of a state, you’re generally and technically required to be registered to fundraise there.
2. File for charitable solicitation registration
Once you’ve researched the various requirements necessary to fundraise in new states, the next step you’ll likely take is to register to solicit donations from residents there.
You’ll need to register for charitable solicitations in every state jurisdiction where you’ll ask for donations. Check out the Labyrinth guide to solicitation registration for a comprehensive overview, but here are the essentials to keep in mind about this process:
- Charitable solicitation registration (also called fundraising registration) is essentially intended to “prove” to state governments that your nonprofit is federally recognized as a 501(c)(3) and in compliance with IRS regulations.
- Currently, 41 states and the District of Columbia require nonprofits to register before they can begin actively soliciting donations from their residents.
- The registration process is handled through either the Attorney General or Secretary of State office in each state, whichever is in charge of regulating nonprofits.
- States have different requirements for what needs to be included in your initial registration filing and subsequent renewals.
- The most common requirements include copies of your most recent Form 990, your nonprofit’s organizing documents, IRS Letter of Determination, and contracts with fundraising consultants or commercial co-venturers.
- Many states also have additional requirements, like other state-specific forms and audited or reviewed financial statements.
- Always double-check the exact requirements in the state jurisdictions where your nonprofit is expanding its operations.
- Solicitation registrations need to be renewed regularly, but states can follow slightly different renewal timelines—more on this in the next section.
- Penalties for failing to register or renew can vary, from fines and late fees (sometimes quite hefty) to even civil or criminal action against your officers and directors. It definitely pays to stay compliant.
If you’re expanding into multiple states at once (or renewing in multiple states), you’ve possibly read about the Unified Registration Statement, or URS. This form was developed in an effort to simplify the registration process across states, compiling all of the relevant documentation into a single place for nonprofits to complete.
Unfortunately, due to constantly-changing state requirements and its logistical complexities, the URS is not entirely useful for most nonprofits these days. The registration approval process can take a long time anyway, and the complexities and possible rejections that accompany the URS make it a less than ideal choice if you’re eager to hit the ground running in new states.
We recommend not using it and instead relying on the state-specific forms and processes that each jurisdiction requires. Working with a compliance professional who can manage the entire multi-state process for you will be your safest bet. However, if you’re only expanding into one or two new states and are prepared to put in all the necessary prepwork, the registration process is do-able on your own.
3. Keep an organized renewals calendar
Speaking of the necessary prepwork for nonprofit compliance, don’t forget about your ongoing requirements once you’re fully operational in new states.
Organization will be key. Even aside from registration compliance, multi-state operations are complicated! Prioritize organization any way you can, like by using a shared donor management system and clearly defining roles and contacts across your different locations.
In terms of compliance, you’ll need to develop a standardized system for keeping track of all the moving pieces. Each of the various regulatory elements discussed so far can all come with their own renewal schedules. These can quickly become confusing, especially if your organization has only recently expanded beyond its home state.
Remember that growing a nonprofit is all about creating scalable, sustainable systems. This is why we recommend creating a centralized renewals calendar and an organizing filing system as early as possible. Scrambling to create these down the line can result in serious logistical headaches and (even worse) missed deadlines, late fees, and other penalties.
You’ll also need to ensure that your team fully understands what’s required of your nonprofit in different states. Round up all of the necessary requirements, keep them updated as they change over time, and make sure they’re easily accessible. It might be a good idea to organize an eLearning course for the individuals who’ll be involved in maintaining compliance as your organization expands.
However, to take all of the guesswork out of the process, many nonprofits choose to partner with compliance experts to manage filings on an ongoing basis. These professionals can stay on top of regulatory changes and handle initial registrations and subsequent renewals for you. If you’re expanding into multiple states at once, this is often the best choice to ensure complete compliance over time.
4. Appoint on-the-ground registered agents
Another immediate consideration you’ll need to address when expanding into a new state is determining whether you need to appoint a registered agent for your nonprofit. This applies to any state where you’re required to file annual corporate reports. These states include:
- The state where your nonprofit is incorporated, your home state
- States where you have or will have paid staff
- North Dakota and the District of Columbia (if you’re registered or will register to fundraise there)
Registered agents are individuals who you appoint to serve as your nonprofit’s representatives, receiving legal documents on your behalf. You’ll be required to name one in your initial corporate registration and then keep their contact information up-to-date going forward.
This requirement is fairly straightforward, but it’s extremely important. If your nonprofit is required to register to conduct business in a state, the registration process can’t move forward without a named registered agent.
Nonprofits might name team leaders or board chairs as their registered agents in jurisdictions where it’s required, but it’s also important to note that your registered agent must reside or work in that state. To simplify the process, many organizations work with commercial registered agent services, who provide dependable representation on an ongoing basis and can forward new legal or tax documents to your nonprofit’s headquarters.
Nonprofit compliance is complicated, especially across multiple state lines. If the time is right for your organization to expand its operations and grow its footprint on a national scale, you can’t afford to neglect necessary regulatory elements.
As you get started, we recommend conducting plenty of research both on your own and with the help of professionals. Compliance experts, attorneys, and CPAs will be invaluable partners as your organization grows, so if you’ll need their help, go ahead and start those relationships early. Most importantly, remember that compliance is a complex but necessary part of running your nonprofit. With the right help and preparation, you’ll be able to avoid costly and damaging compliance issues and instead keep the focus on growing your mission.