How do you form a nonprofit corporation in Texas?
You are not required to incorporate to form a nonprofit organization in Texas, but many nonprofits do to take advantage of both the tax-exempt status of a nonprofit organization and the protections of incorporation under Texas law.
In this article, we will discuss:
- What a nonprofit corporation is,
- How to ensure your corporation has tax-exempt status, and
- How to set up your nonprofit corporation in Texas.
What is a Nonprofit Corporation?
A Texas nonprofit corporation is a corporation authorized by the Texas Business Organizations Code (BOC) that is set up in a way that prohibits distributions to members, directors, or officers.
Nonprofit corporations can be created for any purpose permitted by the BOC or for any lawful purpose, and not all nonprofit corporations have tax exempt status.
Unincorporated Nonprofit Associations
An unincorporated nonprofit association may or may not be tax exempt, is subject to the provisions of the Uniform Unincorporated Nonprofit Association Act, and is defined as an “unincorporated organization consisting of three or more members joined by mutual consent for a common, nonprofit purpose.”
How to Form a Nonprofit Corporation in Texas
So, how do you create a nonprofit corporation in Texas?
First, decide what the corporation’s purpose will be – one of the requirements for tax exempt status is that the organization’s purpose qualifies under the IRS Code. Qualifying purposes include charitable, religious, scientific, literary, public safety, amateur sports competitions, and prevention of cruelty to animals or children.
Choose a name for your corporation – you must choose a unique name that is not already taken by another Texas organization. You can check the Texas Secretary of State’s website to see if the name you choose is available.
If you are not immediately filing your Articles of Incorporation, you can request to reserve your corporate name for up to 120 days.
Board of Directors and Organizer
You must select a minimum of three members for a board of directors, and an organizer (incorporator) who will sign the Articles of Incorporation. The incorporator can be any person over the age of 18, another corporation, or another type of legal entity.
You also must select an agent for service of process who has a physical address in the State of Texas and who agrees to accept legal papers on behalf of the corporation if the corporation is sued.
The nonprofit corporation cannot be its own agent for service of process, but it can be an employee, director, or the incorporator.
Before filing your Articles of Incorporation, you should draft bylaws that include the corporation’s rules and procedures for:
- Holding meetings,
- Election of officers and board members,
- Other corporate formalities.
Your bylaws must comply with Texas law, but they do not need to be filed with your articles, and you should consider them a “rule book” for future board meetings and elections.
Your bylaws should also include a conflict-of-interest policy that protects the organization from directors’ or officers’ personal or financial conflicts of interests.
File the Articles of Incorporation
You will need to prepare and file a Certificate of Formation Nonprofit Corporation (Form 202) which includes:
- The corporate name,
- The street address for the registered agent,
- The names and addresses of the board of directors,
- The name and address of the organizer (incorporator),
- Whether or not the nonprofit will have members,
- The purpose for which the nonprofit is formed (see “purpose” above – this can affect your tax-exempt status), and
- The effective date of the nonprofit’s creation, which could be the filing date or a date that you choose.
Your Articles will also need to contain specific information to claim 501(c)(3) tax-exempt status, including:
- A qualifying statement of purpose,
- A statement that the corporation will not engage in political or legislative activity or any activities other than its tax-exempt purpose, and
- A dissolution clause that transfers the corporation’s assets to another 501(c)(3) organization or to the government upon dissolution.
Board of Directors’ Meeting
Your corporation’s board of directors must hold its initial meeting where they will:
- Approve the bylaws and other policies,
- Elect the corporate officers,
- Approve the applications for tax-exempt status with the IRS and Texas Comptroller, and
- Transact all initial business for the corporation.
Minutes should be kept of the proceedings, and a system should be in place to store and safeguard the corporation’s minutes, Articles, bylaws, and other documents.
Get an FEIN for the Corporation
Your nonprofit corporation should apply for a federal employee identification number (FEIN), which can be done on the IRS’s website.
Get Business Licenses
Depending on the nature of the nonprofit’s business operations, you may be required to obtain business licenses from the state, county, or city where the nonprofit will be located.
File Applications for Tax-Exempt Status
First, you will need to request your tax-exempt status from the IRS using either IRS Form 1023 or IRS Form 1023-EZ. Once you have received your tax-exempt status from the IRS, you can request tax-exempt status from the Texas Comptroller (exemptions from sales tax, franchise tax, or hotel taxes) using Form AP-204.
Please feel free to contact one of our Murray Lobb attorneys to obtain our legal advice regarding the formation of a 501(c)(3) nonprofit corporation. We also remain available to help you with all your general corporate, construction law, business, and estate planning needs.