Most nonprofits are 501(c)(3) organizations, which means they are formed for religious, charitable, scientific, literary, or educational purposes and are eligible for federal and state tax exemptions. To create a 501(c)(3) tax-exempt organization, first you need to form a Texas nonprofit corporation. Then you apply for tax-exempt status from the IRS and the state of Texas. Here are the details.
Form Your Texas Nonprofit Corporation
First, you need to form a nonprofit corporation under Texas state law (the Texas Business Organizations Code (“BOC”).
1. Choose the initial directors for 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.
2. Choose a name for your Texas nonprofit corporation
The name of your nonprofit corporation cannot be the same as, deceptively similar to, or similar to the name of any existing domestic or foreign entity, or any name reservation or registration filed with the Secretary of State.
To see if your proposed name is available, you can check the SOSDirect online directory (for a small fee) on the Secretary of State’s website. You can also email or call the Secretary of State’s office to request a preliminary name availability check.
3. Prepare and file your nonprofit articles of organization
You create your nonprofit entity by filing a certificate of formation with the Texas Secretary of State. Your certificate of formation must include basic information such as:
- 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.
See BOC §§3.005 and 3.009 for more information on what to include in your certificate of formation.
The Secretary of State has a fillinable certificate of formation form for nonprofits on its website which you can use to create your Texas nonprofit corporation. Complete and file your certificate following the instructions provided on the Secretary of State’s website.
The certificate of formation form available from the state has the minimal information necessary to create a nonprofit in Texas. It does not include language required by the IRS to obtain 501(c)(3) federal tax-exempt status. To receive tax-exempt status from the IRS, you'll need to have additional specific language in your certificate, including:
- 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.
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. Make sure you include the tax-exempt required language in the certificate you create. For additional information on forming your Texas nonprofit corporation, 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 Secretary of State’s website.
4. Prepare bylaws for your Texas nonprofit corporation
Before you file your certificate of formation, you’ll need to have bylaws that comply with Texas law. Your bylaws contain the rules and procedures your corporation will follow for holding meetings, electing officers and directors, and taking care of other corporate formalities required in Texas. Your bylaws do not need to be filed with the state -- they are your internal operating manual.
5. Hold a meeting of your 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.
6. Set up a corporate records binder
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 more information, as well as minutes forms, consent forms, and other resolutions, see Nonprofit Meetings, Minutes & Records, by Anthony Mancuso (Nolo).
Obtain Your Federal and State Tax Exemptions
Now that you have created your nonprofit corporation, you can obtain your federal and state tax exemptions. Here are the steps you must take to obtain your tax-exempt status:
1. File your Form 1023 federal tax exemption application.
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. This long and detailed form asks for lots of information about your organization, including its history, finances, organizational structure, governance policies, operations, activities, and more. For line-by-line instructions on how to complete the Form 1023, see How to Form a Nonprofit Corporation, 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.
See the IRS website for more information on the Form 1023 and Form 1023-EZ filing requirements.
2. Obtain your Texas state tax exemptions
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. Check with your local tax appraisal district if you think your nonprofit is eligible for a property tax exemption.
3. Other state reporting and registration requirements
Texas does not require nonprofits to register with the state before soliciting contributions from state residents. You may have to register your nonprofit in other states before you engage in any out-of-state solicitations.