If you are interested in creating a 501(c)(3) federally, tax-exempt organization, you first need to form a Texas nonprofit corporation. Only after you have successfully created a Texas nonprofit can you create a 501(c)(3) federally, tax-exempt corporation. Once your Texas nonprofit is created you are ready to apply for federal tax-exemption status from the IRS (and the state of Texas, of course) for your nonprofit. Just because you create a Texas nonprofit corporation does not mean that you are exempt from federal taxes and state franchise taxes until you apply for exemption from those individual entities.
What law governs the creation of nonprofit corporations in Texas?
The Texas Business Organizations Code (“BOC”) is the governing law in Texas. See The Texas Business Organizations Code, Doing Business with the Secretary of State On and After January 1, 2010, A Guide for Texas Nonprofit Corporations, available on the Texas Secretary of State’s website.
What law governs the creation of nonprofit corporations Federally?
The IRS and the Federal Tax Code govern the exemption status of nonprofit corporations from federal taxes. For information on IRS requirements for tax exemption, including sample language, see IRS Publication 557, Tax-Exempt Status for Your Organization, available on the IRS website.
What is the benefit of being a nonprofit corporation?
Most nonprofits are formed for religious, charitable, scientific, literary, or educational purposes and are eligible for federal and state tax exemptions. The tax exemption status alone is enough to encourage you to create a nonprofit corporation.
Who will be in charge of your nonprofit?
In Texas, you must have at least three directors on your board (unless your nonprofit is managed by members instead of directors). The incorporator can be a natural person 18 years old or older, a corporation, or another legal entity.
Choose a name for your nonprofit wisely
The name of your nonprofit corporation cannot be the same as, or similar to the name of any existing domestic or foreign entity, or any name reservation or registration filed with the Secretary of State. See Texas Business Organizations Code, § 5.053. To see if your proposed name is available, you can check the Secretary of State’s website for a small fee. Or, if you would prefer you can call the Secretary of State at (512) 463-5555 and request a preliminary name availability check for no charge.
Articles of Organization for your Texas nonprofit corporation
You must file a certificate of formation with the Texas Secretary of State to create your nonprofit corporation. Per the Texas Business Organizations Code (BOC) § 3.005 and 3.009, the following information MUST BE INCLUDED in the certificate of formation to be valid:
- the name of the corporation
- that the entity being formed is a nonprofit corporation
- the purpose or purposes for which the entity is formed
- the period of duration, if the entity is not formed to exist perpetually
- the street address of the initial registered office of the entity and the name of the initial registered agent at the office
- the name and address of each organizer for the entity
- if the nonprofit is to have no members, a statement to that effect
- if management is to be vested in the nonprofit ‘s members, a statement to that effect
- the number of initial directors and the names and addresses of those directors or, if management is vested solely in members, a statement to that effect, and
- if the nonprofit is to be authorized on its winding up to distribute assets in a manner other than as provided by BOC §22.304, a statement describing the manner of distribution.
You can fill in an editable certificate of formation on the Secretary of State’s website to ensure you meet the basic statutory requirements for this document. The certificate of formation form available from the state has the minimal information necessary to create a nonprofit in Texas. It is incredibly important to recognize that the form provided by the state does not include language required by the IRS to obtain 501(c)(3) federal tax-exempt status.
How do I ensure my Texas certificate of formation complies with IRS requirements?
To receive tax-exempt status from the IRS, you’ll need to have additional language in your certificate of formation that Texas does not require. If you choose to use the form provided by the state for your certification of formation, you will be responsible for making sure additional information is included in your certificate of formation. Some of this additional information includes the following:
- a statement of purpose that meets IRS requirements
- statements that your non-profit will not engage in prohibited political or legislative activity, and
- a dissolution of assets provision dedicating your assets to another 501(c)(3) organization upon dissolution.
Prepare bylaws for your Texas nonprofit corporation
Before you file your certificate of formation, you’ll need to make sure the “in’s and out’s” of the nonprofit corporation are in place. This means that you have created bylaws that comply with Texas law. Your bylaws are not filed with the state, instead they are kept internally by the nonprofit to guide the nonprofit for holding meetings, electing officers and directors, and taking care of other corporate formalities required in Texas.
Board of Directors
- Your first board meeting is usually referred to as the organizational meeting of the board. The board should take such actions as:
approving the bylaws
- appointing officers
- setting an accounting period and tax year, and
- approving initial transactions of the corporation, such as the opening of a corporate bank account.
After the meeting is completed, be sure to create minutes that accurately record the actions taken by the board.
Take note of your action
You should set up a corporate records binder for your nonprofit to hold important documents such as your certificate of formation, bylaws, and minutes of meetings. For useful information, as well as minutes forms, consent forms, and other documents, see Nonprofit Meetings, Minutes & Records, a book by Anthony Mancuso (Nolo) created to assist nonprofits in properly running (and recording) their meetings.
Federal Form 1023 requesting federal tax exemption for your nonprofit
Now that you have created your Texas nonprofit corporation, you can obtain your federal and state tax exemptions. To obtain federal tax-exempt status from the IRS, you will need to complete and file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. For instructions on how to complete the Form 1023, see How to Form a Nonprofit Corporation; another useful book by Anthony Mancuso (Nolo).
Smaller nonprofits may be eligible to file Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. This is a much simpler, shorter form that is filed online. Only smaller nonprofits–those with projected annual gross receipts of less than $50,000 and total assets of less than $250,000–are eligible to use the streamlined 1023-EZ application. Note – the IRS website has more information on the Form 1023 and Form 1023-EZ filing requirements.
Obtain your Texas state tax exemptions by filing Form AP-204
You must apply to the Texas Comptroller of Public Accounts for an exemption from state sales, franchise, and hotel taxes. The easiest way to do this is to complete and file Form AP-204 with the Texas Comptroller after you have obtained your federal tax exemption. Include a copy of your IRS exemption letter with your application. Note – you should check with your local tax appraisal district if you think your nonprofit is eligible for a property tax exemption.
Now, you’re FINALLY done! At this point you should be a fully recognized, 501(c)(3), nonprofit organization that is exempt from state and federal taxes! As you can see there are many important steps necessary to successfully create a nonprofit corporation.
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