Delaware nonprofit law treats a nonprofit as a nonstock corporation under Title 8 of the Delaware General Corporation Law, the same statute that governs the state’s for-profit companies. To form one, you file a Certificate of Incorporation with the Delaware Division of Corporations, obtain an EIN, and apply to the IRS for federal tax-exempt status. From there, the DGCL and the Internal Revenue Code set the rules for governance, compensation, reporting, and eventual dissolution.
Forming the Corporation
Every Delaware nonprofit starts with a Certificate of Incorporation. Under Section 102 of the DGCL, that document has to include a few required elements.1Justia. Delaware Code Title 8 Chapter 1 Subchapter I Section 102 – Contents of Certificate of Incorporation
- A corporate name containing a word such as “corporation,” “association,” “foundation,” “incorporated,” “institute,” or “company” (or an abbreviation), and distinguishable from every other entity on file with the Division of Corporations.
- A purpose statement. If you plan to seek 501(c)(3) status, the IRS requires the organizing document to limit your purposes to exempt purposes under that section.2Internal Revenue Service. Charity – Required Provisions for Organizing Documents
- A registered agent with a physical street address in Delaware to accept legal documents.3Delaware Division of Corporations. Certificate of Incorporation for Exempt Corporation
- A dissolution clause stating that remaining assets will go to another 501(c)(3) organization, the federal government, or a state or local government for a public purpose.4Internal Revenue Service. Does the Organizing Document Contain the Dissolution Provision Required Under Section 501(c)(3)
To qualify as an exempt corporation under Delaware law, the entity must meet the definition in Section 391(j): a corporation not authorized to issue capital stock that either qualifies under IRC 501(c), is organized primarily for religious or charitable purposes, or has no part of its net earnings benefiting any member or individual.5Delaware Division of Corporations. Corporate Forms and Certificates for an Exempt Corporation
Getting an EIN and Federal Tax-Exempt Status
After incorporation, apply for an Employer Identification Number. Every nonprofit needs one, employees or not. The online IRS application at IRS.gov/EIN issues the number immediately; fax filing of Form SS-4 typically takes about four business days, and mail runs four to five weeks.6Internal Revenue Service. Instructions for Form SS-4 (Application for Employer Identification Number)
Once you have the EIN, you can file for exempt status. Most organizations seeking 501(c)(3) recognition file Form 1023 and pay a $600 user fee. Smaller groups that expect annual gross receipts of $50,000 or less and hold total assets under $250,000 can use the streamlined Form 1023-EZ for $275.7Internal Revenue Service. Form 1023 and 1023-EZ: Amount of User Fee Churches, schools, hospitals, and organizations that were previously revoked cannot use the EZ and must file the full Form 1023.8Internal Revenue Service. Instructions for Form 1023-EZ
Your application must show that the organization’s purpose is charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, or preventing cruelty to children or animals.9Internal Revenue Service. Exempt Purposes – Internal Revenue Code Section 501(c)(3)
Governance Under the DGCL
Section 114 makes the general corporation law apply to nonstock corporations, with references to “stockholders” read as “members” and “board of directors” read as “governing body.”10Justia. Delaware Code Title 8 Chapter 1 Subchapter I Section 114 – Application of Chapter to Nonstock Corporations The same governance flexibility that draws for-profits to Delaware is available to nonprofits.
Directors and Duties
The governing body must include at least one natural person under Section 141. The number of directors is set by the bylaws or the certificate of incorporation, and a majority constitutes a quorum unless the certificate or bylaws set a different threshold (as low as one-third).11Delaware Code Online. Delaware Code Title 8 Chapter 1 Subchapter IV
Directors owe two fiduciary duties. The duty of care requires the attention a reasonably prudent person would bring to comparable decisions. The duty of loyalty requires putting the organization ahead of personal interests. Delaware courts apply these standards when they review challenged board decisions.
Bylaws and Members
The board adopts bylaws covering how directors are elected or appointed, terms of service, officer roles, meeting procedures, quorum, and amendment procedures. Delaware does not require a nonprofit to have members. If the organization does have voting members, their rights should be spelled out in the bylaws, because members take on the role shareholders play in a for-profit: voting on major decisions such as electing the governing body and approving dissolution.
Conflict of Interest Policy
The IRS expects 501(c)(3) organizations to adopt a written conflict of interest policy. The sample policy in the Form 1023 instructions requires directors and officers with a financial interest in a proposed transaction to disclose it, leave the room during deliberation and vote, and allow disinterested directors to decide whether the transaction is fair to the organization. Minutes must document the conflict, the alternatives considered, and the vote, and each director and officer must sign an annual acknowledgment.12Internal Revenue Service. Instructions for Form 1023 – Appendix A: Sample Conflict of Interest Policy
Compensation Limits
Paying an insider more than their work is worth can trigger federal excise taxes. Under IRC Section 4958, an “excess benefit transaction” happens when a person with substantial influence over a 501(c)(3) or 501(c)(4) receives compensation greater than reasonable for comparable services. The IRS looks at total compensation, including salary, bonuses, retirement contributions, and non-cash perks.
The recipient owes an initial excise tax of 25% of the excess amount. If they don’t return the overpayment within the taxable period, the tax jumps to 200%. An organization manager who knowingly approved the transaction faces a separate 10% tax, capped at $20,000 per transaction.13Office of the Law Revision Counsel. 26 U.S. Code 4958 – Taxes on Excess Benefit Transactions Best practice is to have a committee of disinterested directors review comparable salary data, document the basis for the decision, and vote with the interested person absent.
Public Charity or Private Foundation
When the IRS grants 501(c)(3) status, it also classifies the organization as a public charity or a private foundation. Private foundations owe an additional excise tax of 1.39% on net investment income.14Office of the Law Revision Counsel. 26 U.S. Code 4940 – Excise Tax Based on Investment Income
To qualify as a public charity under Section 509(a)(1), an organization generally has to show that at least one-third of its total support over a five-year period comes from the general public, government grants, or other public sources. A “facts and circumstances” test may apply where public support is between 10% and one-third, provided the organization actively solicits public donations. Under Section 509(a)(2), that one-third can combine public donations and program service revenue, but gross investment income and unrelated business income must stay below one-third of total support.15eCFR. 26 CFR 1.509(a)-3 – Broadly, Publicly Supported Organizations
Failing the public support test for two consecutive years results in reclassification as a private foundation, triggering the investment income tax, mandatory Form 990-PF filing, and possible termination taxes under Section 507. Delaware private foundations with in-state activities must also file a copy of the Form 990-PF with the Delaware Attorney General.16Delaware Division of Revenue. Non-profit Corporations
Delaware Taxes
A nonprofit recognized under Section 501(c) is automatically exempt from Delaware corporate income tax. It is also exempt from the Delaware business license requirement and from the gross receipts tax on most goods and services. Some activities stay taxable, including leasing tangible personal property and providing accommodations.16Delaware Division of Revenue. Non-profit Corporations
Delaware has no state or local sales tax, so there is no sales tax exemption to apply for.17Division of Revenue – State of Delaware. Exemption Certificates Property tax exemptions are narrower than many founders expect. State law provides a specific exemption for nonprofit housing for the elderly built under the National Housing Act, with detailed certification and reporting rules. Beyond that, exemptions depend on county-level rules, so check with the assessment office in the county where any real estate is located.
Annual Reporting
State and federal reporting overlap, and missing either can bring penalties or loss of exempt status.
Delaware Annual Report
Every exempt domestic corporation must file an annual report with the Division of Corporations by March 1. Exempt corporations don’t pay franchise tax, but they do owe a $25 report fee. Delaware requires domestic corporation annual reports to be filed electronically.18Delaware Division of Corporations. Annual Report and Tax Information
IRS Form 990
Federal filing depends on size. Nonprofits with gross receipts of $200,000 or more, or total assets of $500,000 or more, file Form 990. Mid-sized organizations below those thresholds but with gross receipts above $50,000 can file Form 990-EZ. The smallest organizations, with gross receipts normally under $50,000, file the Form 990-N e-Postcard.19Internal Revenue Service. Annual Form 990 Filing Requirements for Tax-Exempt Organizations Failing to file for three consecutive years results in automatic revocation of exempt status.20Internal Revenue Service. Exempt Organization Annual Filing Requirements Overview
Charitable Solicitation
Unlike most states, Delaware has no statute requiring registration of charitable solicitations or fundraisers with a state agency.21State of Delaware Division of Revenue. Fundraisers and Charitable Solicitations The Attorney General’s office provides general oversight of charities, but there is no formal registration process.22Internal Revenue Service. Charities and Nonprofits in Delaware If your nonprofit solicits in other states, you may still need to register in each of those states.
Employer Registration
Even tax-exempt nonprofits must register with the Delaware Division of Revenue and withhold state income tax on employees performing services in Delaware, and must register with the Delaware Department of Labor.16Delaware Division of Revenue. Non-profit Corporations
Director Protection and Indemnification
Section 145 of the DGCL allows a corporation to indemnify any director, officer, employee, or agent sued because of their role. In actions brought by outside parties, the corporation can cover legal fees, judgments, fines, and settlement amounts, provided the person acted in good faith and reasonably believed their conduct was in the organization’s best interests. For criminal proceedings, the person also must have had no reasonable cause to believe the conduct was unlawful.23Justia. Delaware Code Title 8 Chapter 1 Subchapter IV Section 145 – Indemnification of Officers, Directors, Employees and Agents
For lawsuits brought by or on behalf of the corporation itself, indemnification is limited to legal expenses and doesn’t apply where the person has been found liable to the corporation, unless a court decides indemnification is fair despite the adverse judgment. Many nonprofits also include a certificate provision eliminating directors’ personal liability for monetary damages from breaches of the duty of care. That provision doesn’t cover breaches of loyalty, acts not in good faith, or intentional misconduct, but paired with directors’ and officers’ insurance it makes it easier to recruit volunteer board members.
Dissolving the Organization
Dissolution runs under Section 276, which mirrors the stock corporation procedure with adjustments for nonstock entities.24Justia. Delaware Code Title 8 Chapter 1 Subchapter X Section 276 – Dissolution of Nonstock Corporation; Procedure If the organization has voting members, those members must approve dissolution. Without voting members, a majority of the governing body is enough. A formal meeting can be skipped if everyone entitled to vote consents in writing.
After the vote, you file a Certificate of Dissolution with the Secretary of State. The standard filing fee is $204. Organizations with no assets that have ceased doing business may qualify for a short-form dissolution at $10. Confirm all annual reports and fees are current with the Franchise Tax Section first, because the state won’t process a dissolution while obligations are outstanding.
On the federal side, a 501(c)(3) must distribute remaining assets to another exempt organization, the federal government, or a state or local government for a public purpose.4Internal Revenue Service. Does the Organizing Document Contain the Dissolution Provision Required Under Section 501(c)(3) File a final Form 990 and notify the IRS that the organization has terminated.