Monthly Archives: May 2022

Delaware’s dominance in the race for publicly traded company incorporations is well known. Its success in attracting other types of entities, however, is less understood but no less important. In my paper Where Nonprofits Incorporate and Why It Matters, I study the incorporation behavior of nonprofits, a trillion dollar industry that employs twelve million people and includes some of the most well-known organizations in the world. I find evidence that nonprofits, like publicly traded firms, engage in intentional and strategic incorporation decisions, although at a lower rate. I also find that nonprofits’ incorporation decisions are more consistent with choosing states that maximize nonprofits’ agency costs, rather than minimize them, representing a potential “stroll to the bottom” among nonprofit corporations. The findings raise policy issues about the state of nonprofit law and regulation that I address with attainable, evidence-based solutions.

My paper has three goals. First, I develop the theoretical case for strategic nonprofit incorporations. Just as the state of incorporation can affect publicly traded firms’ cost of capital and therefore their competitive advantage, so too can it affect nonprofits’ operations. Like with traditional corporations, nonprofits’ incorporation state determines the law that governs internal disputes and the courts that often decide those disputes. This can affect nonprofits’ capital costs; although nonprofits lack investors, they often rely as a substitute on capital donations from external donors. If a state’s law and courts offer donors strong protections—such as by imposing efficient fiduciary duties on management, providing donor standing to sue, or requiring company policies on conflicted transactions and whistleblower complaints—then nonprofits that incorporate in that state could achieve lower capital costs through higher donations. The incorporation state also determines which state attorneys general have oversight responsibility for the nonprofit’s operations, which can also impact nonprofit operations. State attorneys general are charged with primary responsibility for policing nonprofits’ operations, so incorporating in a state with strong oversight could enhance donors’, employees’, customers’, and suppliers’ trust in the nonprofit, increasing the firm’s market advantage. As a matter of organizational theory, therefore, nonprofits should prefer to incorporate in some states over others, just as with publicly traded corporations.

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