I. Background

Before addressing whether New York-based not-for-profit organizations should still follow the two-step process of incorporating in Delaware and subsequently applying for authority to do business in New York, the article (a) provides an overview of the New York law that had led so many organizations to incorporate in Delaware; (b) addresses the benefits of incorporating quickly, and (c) explains why the Act should improve the speed of the New York incorporation process for organizations that previously needed consent from the Education Department.

A. Historical Overview of Incorporating in New York

New York’s Education Law made the receipt of Education Department consent a prerequisite to incorporation if the organization had any “educational” purpose.3 The purpose of requiring organizations to obtain Education Department consent was to make sure no entity was operating a school that had to be chartered by the State Board of Regents. The Education Department took the broad position that a corporation needed its consent if its name or description of its activities in its proposed certificate of incorporation merely “implied” an educational purpose.4

Although the Education Department does not define the term “educational,” it does not use the narrow definition of “educational organization” that entitles an organization to per se recognition as a public charity.5 Rather, in the authors’ viewpoint, the Education Department reviews Certificates of Incorporation if an organization would be described as having an educational purpose in the Treasury Regulations. The Treasury Regulations identify the following examples of organizations as educational:

  • An organization, such as a primary or secondary school, a college or a professional or trade school, which has a regularly scheduled curriculum, a regular faculty and a regularly enrolled body of students in attendance at a place where the educational activities are regularly carried on.6
  • An organization whose activities consist of presenting public discussion groups, forums, panels, lectures or other similar programs.7
  • An organization which presents a course of instruction by means of correspondence or through the utilization of television or radio.8
  • Museums, zoos, planetariums, symphony orchestras and other similar organizations.9

Using the above definition, organizations like after-school programs, all varieties of cultural organizations, and even senior centers with recreational activities would fall under the purview of the Education Department.

In many cases, the Education Department took months to issue its consent, thus causing long delays in the organization’s ability to form and operate. The statute itself does not prescribe a time period in which the Education Department must comply. The Education Department’s website provided that in certain cases, receipt of consent “may exceed 15 days.10 “From the authors’ viewpoint, the emphasis should be on the word “exceed.”

By incorporating in Delaware, organizations avoided the delays caused by New York’s consent requirement. Delaware law contains no such impediment. In fact, the Delaware website advertises that incorporation can be completed in as quickly as an hour.11 Once the organization incorporated in Delaware, it was immediately able to begin conducting its affairs and begin carrying out the important tasks discussed in the section below.

It is important to note that incorporating in Delaware only delayed, but did not eliminate, the requirement that a New York-based organization receive Education Department consent. Any Delaware corporation that planned to conduct business in New York still had to complete the second step of applying for authority to do business in New York as a foreign corporation.12 The charity would need to obtain Education Department consent before New York would grant it authority to do business in New York. However, by following this strategy, the organization had already formed a corporation that could begin operating and carrying out the important formative tasks discussed below without waiting for Education Department to issue its consent.

The only downside to this strategy was that the organization had to pay fees to both Delaware and New York. However, the majority of organizations found these relatively minimal added fees were worth avoiding the delays caused by the Education Department.

B. Why Incorporating Quickly Matters

The ability to incorporate quickly provides two main benefits to not-for-profit organizations: (1) the ability to file an application for recognition of exemption from income tax (“Form 1023”)14 and (2) the ability to receive tax-deductible contributions.

First, the federal government makes incorporation a prerequisite to filing an application for recognition of exemption from income tax (“Form 1023”). Form 102315 is the application that charitable organizations must file with the Internal Revenue Service (“IRS”) to receive classification as a Section 501(c)(3) organization. This IRS’s review of Form 1023 can take between several months to more than a year, but the application cannot be submitted unless the corporation has incorporated.16

Second, incorporation is also a prerequisite to receiving tax-deductible contributions.17 The Code generously permits a donor to deduct contributions made to not-for-profit corporations, provided the entity submits its Form 1023 within twenty-seven months of the date of its incorporation and the IRS ultimately approves the application.18 Provided both requirements are met, tax-exempt status is retroactive to the date of incorporation. But tax-exempt status is not retroactive to the date the Education Department receives a certificate of incorporation to review. Consider the example of a wealthy donor who is looking to make a year-end contribution to a new organization. The organization may lose the contribution if the Education Department did not provide its consent by the year’s end. Timely incorporating in Delaware eliminates this problem.

C. The Act Should Speed Up the New York Incorporation Process for Many Not-For-Profit Corporations

The Act makes amendments to Section 216 of the Education Law and Section 404(d) of the Not-for-Profit Corporation Law that eliminates the requirement that any organization with an educational purpose obtain consent from the Education Department before it can incorporate. Instead, the revised versions of these statutes make Education Department consent required only if the corporation will be operating a school, college, university, library, museum or historical society.19 Other corporations with an educational purpose must only provide a certified copy of their Certificate of Incorporation to the Education Department within thirty days of the date of incorporation20 and include the following language in their Certificate of Incorporation:

The Corporation’s purposes and powers do not include any of those described in paragraphs (a) through (v) of this section.21

The majority of corporations that previously required Education Department consent would no longer be subject to this requirement. When these organizations submit their certificate of incorporation to New York Department of State, the incorporation process should now be able to be completed within a similar time frame as certificate submitted to the Delaware Department of State.22 Similar to Delaware, New York offers incorporation on an expedited basis, though these services are subject to additional fees.23

II. Some organizations may still prefer to incorporate in Delaware

Although the act will improve the speed of incorporating in New York, incorporating in Delaware will still be advantageous to certain organizations. First, certain organizations must still obtain the consent of a New York agency as a prerequisite to incorporation. These organizations may still wish to follow the two-step process outlined above. Second, organizations that desire greater operational flexibility and more limited state-level governance should still consider incorporating in Delaware; however, as discussed below, before selecting Delaware for these reasons, the organization should evaluate to what extent it would be forced to comply with the New York laws it is trying to avoid by operating in New York or in an effort to obtain and maintain exemption from income tax.

A. Consent May Be Required From Agencies Other Than the Education Department

The Education Department is not the only state agency that must approve or consent to an organization’s incorporation. Indeed, the Not-For-Profit Corporation Law contains more than twenty categories of organizations that must first obtain approval or consent from a specified New York agency as a prerequisite to incorporation.24 For example, certain health-related organizations are required to obtain approval from the Commissioner of Health or Public Health Council;25 similarly, certain child-care organizations must obtain the consent of the Commissioner of Social Services.26

The Act only eliminates the requirement that many organizations with an educational purpose receive the consent of the Education Department. Corporations that will be operating a school, museum, library or historical society will still be reviewed by the Education Department. Further, schools, colleges, universities and other entities providing post-secondary education must receive written authorization from the Board of Regents.27 Moreover, aside from organizations with an educational purpose, organizations with other purposes specified in Section 404 must still receive the requisite approval or consent as a prerequisite to incorporation. If time is of the essence, these organizations should still consider incorporating in Delaware.

B. Delaware Provides Greater Operational Flexibility and More Limited State-Level Governance

New York-based organizations may still wish to incorporate in Delaware because of its greater operational flexibility and more limited state-level governance. However, before incorporating in Delaware, New York-based organizations should consider whether they would be forced to comply with the New York laws they are trying to avoid by operating in New York or in an effort to obtain and maintain their tax-exempt status. This section begins with an overview of the general laxities of Delaware law and subsequently addresses some of the provisions of New York law, including provisions of the Act, which might make a New York-based organization consider incorporating in Delaware.

Delaware, a state well known for being a haven for the formation of corporations, has one of the most lax set of laws regulating not-for-profit corporations. In fact, it is one of few states that do not even have a separate body of law governing not-for-profit corporations. The only Delaware law specific to not-for-profit corporations is the Delaware Charitable/Fraternal Solicitation Act, which merely prohibits fraud when soliciting funds. Otherwise, in Delaware, not-for-profit corporations are governed by the Delaware General Corporation Law (“DGCL”), the same body of law that governs for-profit Delaware corporations. Comparatively, New York not-for-profit corporations are governed by the Not-for-Profit Corporation law, a separate body of law that highly regulates the affairs of such corporations.28

The DGCL is so lax that it permits corporations to disregard its default provisions provided the corporation does not adopt provisions contrary to the laws of Delaware. For example, DGCL 102(b)(1) provides that the Certificate of Incorporation can include “[a]ny provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, . . . or the members of a nonstock corporation.29” As another example of Delaware’s overall laxity, the DGCL permits not-for-profit corporations to authorize less than one-third of the voting directors as a valid quorum.30 The New York Not-for-Profit Corporation does not approach that same level of flexibility.

Despite the great flexibility of the DGCL, before rushing to Delaware, New York-based corporations must remember that their governing documents must still conform to the standards of the Internal Revenue Service, which reviews governing documents to ensure that not-for-profit corporations are not organized for the private benefit of any individual.31 Thus, although Delaware permits corporations to have a single director or for quorum to be reached with few votes, the Internal Revenue Service would abhor that concentrated level of control.

Incorporating in Delaware may also be attractive to New York-based entities that wish to avoid some of the Act’s governance-related provisions. For example, the Act imposes a three-step process that every New York not-for-profit corporation must follow before entering into a transaction with a related party.32 Although Delaware does not contain such a provision,33 New York’s three-step process for entering into related-party transactions largely mimics the Treasury Regulation’s recommended procedure for all tax-exempt organizations irrespective of the state of incorporation.34 Thus, the rules that New York-based entities might look to avoid may actually “inure” to their benefit by helping them maintain their recognition of exemption from federal income tax.

On the other hand, by incorporating in Delaware, New York-based organizations will benefit from certain advantages of Delaware law that should not impact their tax-exempt status. For example, with respect to the dissolution of a not-for-profit corporation, Delaware law does not require an organization to obtain the approval of its Attorney General.35 All that is required is filing a certificate of dissolution with the Secretary of State.36 Comparatively, although the Act simplified the process that New York corporations must follow for major structural changes, the procedure remains more complicated than Delaware. The prior law mandated a two-step process of review by the Attorney General followed by court approval. The Act permits a one-step process of approval by the Attorney General.37 Additionally, Delaware not-for-profit corporations must manage funds in accordance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA), whereas New York corporations are governed by the more stringent requirements of the New York Prudent Management of Institutional Funds Act.

Finally, before a New York-based organization incorporates in Delaware for the purpose of avoiding specific New York laws, it must remember that if it operates within New York, it must abide by certain provisions of New York law, including certain provisions of the Act. However, the Act clearly imposes financial reporting requirements on most charities operating in New York regardless of their place of incorporation.38 Before considering Delaware, New York-based organizations should carefully evaluate the New York laws they must comply with by virtue of operating within the state.


The Act should reduce the number of New York-based organizations that choose to follow the two-step process of incorporating in Delaware and subsequently applying for authority to do business in New York. Certain organizations may still find incorporating in Delaware attractive, particularly those that would still need to obtain the approval or consent of a New York State agency as a prerequisite to incorporation. Organizations that can now quickly incorporate in New York may also find Delaware attractive for its operational flexibility and more limited state-level governance; however, before selecting Delaware, these organizations must evaluate to what extent they would be forced to comply with the New York laws they are trying to avoid by operating in New York or in an effort to comply with the tax law’s requirements to maintain their recognition of exemption from federal income tax.



2NPCL 404 (d); Education 216

3Education 216 (“No institution or association which might be incorporated by the regents under this chapter shall, without their consent, be incorporated under any other general law [i.e., not-for-profit corporation law].”).

4http://www.counsel.nysed.gov/forms/ques.html (last checked 3/10/2014).

5Section 509(a)(1); see also Section 170(b)(1)(A)(ii).

6Treas. § Reg. 1.501(c)(3)-1(d)(3)(ii), Example 1.

7Treas. § Reg. 1.501(c)(3)-1(d)(3)(ii), Example 2.

8Treas. § Reg. 1.501(c)(3)-1(d)(3)(ii), Example 3.

9Treas. § Reg. 1.501(c)(3)-1(d)(3)(ii), Example 4.

10http://www.counsel.nysed.gov/forms/ques.html (last checked 3/10/2014)


12NPCL 1304. http://www.dos.ny.gov/corps/nfpcorp.html#appauth .

13NPCL 104. The Act adds paragraph d to NPCL 104, which requires a foreign corporation with an educational purpose to notify the Education Department that it has obtained authority to do business in New York.

14Organizations that are recognized as exempt from income tax under a different section other than 501©(3) must file a Form 1024.

15Treas. Reg. § 1.501(c)(3)-1(b)(v)(6) (“any organization which seeks a determination of exemption after July 26, 1959, must have articles of organization which meet the rules of this paragraph”).

16As an alternative to forming a corporation, an organization can be formed as a trust or association and submit its Form 1023.

171.508-1(b); Reg. 1.508–1(a) requires that a new organization must file the notice required by IRC 508 on Form 1023 within 15 months of the end of the month it was organized. However, Reg. 301.9100–2 provides an automatic 12–month extension of the 15–month filing requirement.

18Add note that 99% of applications are ultimately approved.

19Education 216 (new); NPCL 404(d) (new).

20NPCL 404(d) (new).

21NPCL 404(w) (new).

22http://www.dos.ny.gov/corps/nfpcorp.html (last checked March 28).


24NPCL 404

25NPCL 404(c), (o), (t).

26NPCL 404(b).

27NPCL 404(d).

28The Act has even extended the reach of the NPCL by making certain of its provisions apply to NY Trusts. Delaware has Charitable/Fraternal Solicitation Act. http://delcode.delaware.gov/title6/c025/sc10/index.shtml

29See also DGCL 141(j).

30 DGCL 141(j) (“The certificate of incorporation of any corporation organized under this chapter which is not authorized to issue capital stock may provide that less than 1/3 of the members of the governing body may constitute a quorum thereof”); cf. NPCL 707.

31Treas. Reg. 1.501(c)(3)-1(b).

32NPCL 715 (new).

33The Attorney General has not opined on the application of the Act to foreign corporations.

34 Treas. Reg. 53.4958-6. For federal tax purposes, this procedure is referred to as the “Rebuttable Presumption of Reasonableness.” By following the procedure, transactions that might be considered excess benefit transactions are presumed to be reasonable unless the IRS can show “sufficient contrary evidence.”

35DGCL 276.

36DGCL 275.

37 NPCL 511-A (new). Previously, New York law required a two-step process of review by the Attorney General followed by court approval.

38NPCL 172-b(1).


This article by Robert Lyons, Tax Director, Marks Paneth LLP, and Sean R. Weissbart, an attorney with Morris & McVeigh LLP, is reprinted with permission from: Trusts and Estates Law Section Newsletter, Summer 2014, Vol. 47, No. 2, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.

About The Authors

Robert R. Lyons is the Tax Director of Exempt Organizations for Marks Paneth LLP in the New York City office and is the author of numerous books and articles involving taxation of exempt organizations. Mr. Lyons has served as an Adjunct Professor in the graduate department of American University in Washington, DC. Sean R. Weissbart is an attorney in the New York City office of Morris & McVeigh LLP and an Adjunct Professor of Law at Fordham University School of Law. Mr. Weissbart regularly represents tax-exempt organizations in matters relating to formation, compliance with federal and state tax-exemption laws and the avoidance of excise taxes and the unrelated business income tax. The authors regularly collaborate on many clients, projects and presentations involving tax-exempt organizations.

About Robert Lyons

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Robert (Rob) Lyons, CPA, MST, is a Tax Director, Exempt Organizations in the Nonprofit, Government & Healthcare Group at Marks Paneth LLP. Mr. Lyons brings to this role the skills he has developed during more than 30 years of providing tax and consulting services to his clients in the nonprofit, higher education, and public sector industries. His experience includes handling substantial exempt organization tax issues. Mr. Lyons has testified in front of the House and Ways Committee in... READ MORE +

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