Nonprofit corporations or charitable organizations are formed for a mutual or public benefit which does not involve generating profit for owners and investors. Nonprofits appear in various forms, from neighborhood associations and local churches to traditional charities, soup kitchens, and labor unions.
Some of the most popular nonprofits in Texas include Soldiers Angels, Turning point Center, and Minnies Food Pantry. Texas has approximately 130 724 nonprofits. Texas nonprofits come with various benefits such as:
- Postal service discounts
- Access to grants
It could take up to six months to get the organization up and running, but completing the necessary documents timeously and correctly does speed things up.
1. Select a name for your organization
The first step in getting a Texas nonprofit up-and-running is choosing a name for the organization. The nonprofit’s name should comply with Texas naming rules and requirements and should also be easily searchable by both members and donors.
Additionally, ensure that no other business entity has a name that is the same or similar to that of the nonprofit. You may also choose to consult or contact the Secretary of State to request a name availability check.
The name of the Texas nonprofit can be reserved for 120 days by filing a name reservation form known as Form 501 with the Secretary of State in Texas.
2. Nominate a Texas registered agent
The Texas nonprofit needs to have a registered agent. A registered agent is a designated person or corporation that agrees to accept service of process or legal papers on behalf of the organization if it is ever sued. The appointed registered agent must meet the following requirements:
- Must have an official street address in Texas (not a P.O. box address)
- Must be at least 18 years old
- Must be located in the state of Texas
- Must remain available during normal office hours
You may elect any member of your organization, a corporation, or yourself to be the designated service of process agent.
3. Recruit your board members
The nonprofit in Texas requires directors of the organization. The organization’s directors all come together to form the board of directors responsible for effectively running the nonprofit’s operations.
The Texas nonprofit will need a secretary, a president, and at least three directors who are not related to each other. The president, secretary, and other members of the Corporation are known as officers and have individual responsibilities within the organization.
When appointing directors, there are no residency or membership requirements. When recruiting Texas officers, the same person may hold two or more offices, except for the secretary and president positions.
4. Consent to bylaws and conflict of interest policy
Your bylaws must contain two pertinent documents in order to be allowed to apply for 501c3 status. You will need:
- 1. Bylaws
- 2. Conflict of interest policy
The governing documents for the nonprofit are known as the bylaws. Essentially they are the nonprofits operating manual and should be aligned with the Articles of Incorporation and the law.
Additionally, the nonprofit also needs a conflict of interest policy. This policy comes into play when someone within the nonprofit has competing interests and could make choices that benefit themselves or other individuals as opposed to the nonprofit.
The conflict of interest policy is designed to ensure that personal interests are set aside and that the purposes and interests of the nonprofit are prioritized above all.
Bylaws do not need to be filed with the Texas Secretary of State; they should be kept on file for the organization’s internal records.
5. Select a Texas nonprofit startup corporation structure
There are various types of corporate structures for nonprofits in Texas are as follows:
- Mutual benefit corporations: These corporations have the option of pursuing state and IRS tax-exemptions but may choose not to.
- Public benefit corporations: Public benefit NPOs are formed for charitable purposes and act as a civic league or social welfare organization.
- Mutual benefit common interest development corporations: These organizations are created under the Davis Stirling Common Interest Development Act to oversee common interest development, such as a homeowner’s association.
- Religious organizations/corporations: These corporations are solely for religious purposes, such as churches.
Other organizational structures are also used. However, a nonprofit corporation offers more benefits and will be the primary focus in most cases.
The reason nonprofit structures are recommended is to limit liability for both the nonprofit members and avoid taxes. Therefore, a Texas nonprofit organization may be formed in one of the following manners:
- Nonprofit corporation: Nonprofit organizations enjoy federal and state tax exemptions and limited liability.
- Unincorporated nonprofit association: While unincorporated nonprofit associations may enjoy tax-exempt status, they are not protected from personal liability.
Therefore, registration with the Texas Secretary of State is not required. Chapter 252 of the Texas Business Organizations Code is what governs unincorporated nonprofit associations.
- Nonprofit LLC: Anyone may organize a Texas limited liability company or LLC for lawful purposes, including starting a nonprofit, but the law does not make an express provision for a separate nonprofit LLC.
An LLC may only receive tax exemption if all members of that LLC are exempt organizations, which is the IRS‘s stance.
6. Prepare and file nonprofit Articles of Incorporation
Nonprofit corporations in Texas need to file a certificate of formation with the Texas Secretary of State. This is to establish the nonprofit, and it must include the following:
- The nonprofit’s name
- The names and addresses of the initial directors, as well as the names and addresses of the board of directors
- The street address (no P.O. boxes) of the registered office of the nonprofit and the name of the service of process agent at the office
- Whether or not the nonprofit has members
- The purpose for which the organization is created. Please note that the purpose must comply with IRS requirements.
- The name and address of every organizer for the Corporation
- The effective date of the certificate upon filing
The Certificate of Formation Nonprofit Corporation or Form 202 is found on the Texas Secretary of State website. This form must be used to create a Texas nonprofit corporation.
While a certificate of formation is available from the state, it has a limited amount of information needed to create a nonprofit in Texas. The language that the IRS requires is not included in this certificate of formation.
However, language is required by the IRS to secure 501 C3 federal tax-exempt status. In order to receive your 501(c)(3) tax-exempt status from the Internal Revenue Service, a nonprofit must contain specific language in its articles, including:
- A declaration of purpose that complies with IRS requirements (add this in the blank space provided in the “purpose” article on the form)
- A declaration that the organization is not going to participate in activities not related to its exempt purposes
- A dissolution statement committing the nonprofit’s assets to another 501c3 corporation or alternatively to the government upon dissolution(may be added in the “supplemental provisions space on the form)
These statements and clauses must be added to the certificate by the nonprofit founder to receive the tax exemption.
The instructions for IRS Form 1023-EZ contain the sample language approved b the IRS.
Once completed, the Certificate of Formation may be filed by mail or online with the Texas Secretary of State.
7. File an initial report
Nonprofits in the state of Texas do not need to submit an initial report.
8. Secure an EIN (Employer Identification Number)
An EIN is an Employer Identification Number assigned by the Internal Revenue Service to identify a nonprofit organization. Irrespective of what type of nonprofit formation you’ve chosen, you will be required to apply for an EIN even if you don’t intend on hiring employees.
This is because the EIN will be used to open up a bank account for the nonprofit, submit 990 returns to the Internal Revenue Service and 501(c)(3) status in Texas.
Form SS-4 is used to apply for an Employer Identification Number.
9. Apply for federal tax exemption
Creating a nonprofit organization includes a few critical steps, one of the most important being obtaining federal tax-exempt status. Some of the benefits of obtaining 501(c)(3) tax-exempt status include:
- Access to grants
- Tax-deductibility of donations
- Income tax and property tax-exemptions
Complete IRS Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code to apply for tax-exempt status.
Form 1023 needs to be filed no later than 27 months from the date you file the Articles of Incorporation for the Texas nonprofit corporation.
The advantage of filing on time means that the tax-exempt organization status is effective from the date you filed the nonprofit’s Articles of Incorporation, so donations received from the time of incorporation moving forward will be tax-deductible.
If the Texas nonprofit is a smaller organization, then Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) may be used. The form is a simpler and shorter application. The requirements to file using Form 1023-EZ are as follows:
- Nonprofit needs to earn less than $50,000 in annual receipts
- Nonprofit needs to have less than $250,000 in total assets
The IRS will do one of three things once the application for tax-exempt status has been reviewed:
- Send your nonprofit a determination letter stating that the federal tax exemption is granted
- Request further information
- Issue a proposed adverse determination, which is a denial of tax exemption effective 30 days from the date of allocation
If you’ve been denied federal tax exemption, then you may seek legal assistance to make an appeal.
10. Apply for Texas state tax exemption
In order to apply for Texas state tax exemption, nonprofits need to submit an application to the Texas Comptroller of Public Accounts. The same process is relevant for state sales, hotel, and franchise taxes.
Form ap-204 is required and must be completed to apply for state tax exemption to the Texas Comptroller after obtaining the federal tax-exempt status.
The application needs to include a copy of the IRS determination letter along with the state tax application.
11. Other applicable permits and licenses
After forming the Texas nonprofit Corporation, you’ll still need to obtain a tax registration certificate, business license, and other business permits in order to keep your nonprofit above board.
A nonprofit organization merely limits the owner’s personal liability. Even if the organization’s sales are nontaxable, a seller’s permit to sell merchandise and goods in the state of Texas is still required by the nonprofit.
Additional state registration and reporting requirements
Some states require nonprofits to register with the state prior to fundraising or accepting contributions from residents of the state. However, this is not a requirement in the state of Texas.
12. Submit an annual report
Texas nonprofits must file annual reports to stay in good standing with the Texas Secretary of State. The annual reports basically provide the state agency with information that’s updated on the entities registered in the state. In order to comply with state laws, the annual report must also be found on time.
Annual reports must be filed by the 15th of May each year following when you last filed in Texas. For example, if your organization was established in January 2016, then the annual report is due on the 15th of February 2017 using the Public Information Report Form.
If the nonprofit is exempt from franchise tax in Texas, you do not need to file a public information report and should file a periodic report instead.
Any individual who has the permission to submit business filings for your nonprofit may submit the Texas annual report.
Costs of starting a new nonprofit in Texas
- Filing Certificate of Formation: $25
- Name reservation application: $40
- Tax-exempt filing for 501(c): $275 or $600 Internal Revenue Service filing fee
After you’ve started your nonprofit, there are a few necessary steps that you should take to keep your organization running smoothly. Let’s take a closer look at them below:
Open a business bank account
- Maintain accounting and tax filing
- Ensure that your personal assets are kept separate from your nonprofits’ assets
To open a bank account, you will need to provide:
- Your EIN
- A copy of your articles of incorporation
- A copy of your organization’s bylaws.
Hire a business accountant
- Simplify payroll and bookkeeping
- Prevent your nonprofit from avoiding penalties and tax errors
- Manage your nonprofit’s funding
- Focus on growing your nonprofit
- Manage risks
You may opt for General liability, Personal liability, or Worker’s compensation insurance.
Build a website
As we mentioned earlier, you may want to create a website for your organization to legitimize your business or give it more credibility. A dedicated website is also one of the best ways to share your nonprofit’s vision, mission, and story with supporters. Consequently, it’s also a great way to announce upcoming events and goals.
Sign legal documents
One aspect that tends to get overlooked is signing legal documents in your personal capacity instead of as an authorized representative of your nonprofit.
If you’ve appointed yourself as a registered agent of the nonprofit, then the following tips will help avoid personal liability:
- State the registered name of your nonprofit
- Use your name and signature
- State your position/role in the organization as its authorized representative
When signing legal documents on behalf of the nonprofit, it is important that you do so in your capacity as the registered agent, as opposed to your capacity as an individual.
Example: Instead of signing your name only, state the name of the nonprofit and then your name and position within the organization before signing.
While a Texas nonprofit‘s bylaws do not need to be filed with the state, it’s advisable to keep them for the nonprofit’s internal operations. If you want to apply for tax-exempt 501(c)(3) status, then bylaws are definitely going to help the process along. They contain the procedures and rules that your nonprofit is going to follow for electing directors and officers, holding organizational meetings, and taking care of other nonprofit formalities.
Nonprofit corporations are not automatically exempt from taxes in the state of Texas. Additional paperwork and forms are required to submit an application for federal and state tax exemption. Exemption from state taxes may include sales, income, and other state taxes.
Yes, it is possible for a Texas nonprofit corporation to lose tax-exempt status if they do not comply with state laws. To comply, you must submit periodic reports, tax returns and maintain corporate records with the state.
No, you do not need to hire a lawyer to get your Texas nonprofit organization up and running. All the required information may be found online and on government websites like the Texas Secretary of State website.