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.
First, you need to form a nonprofit corporation under Texas state law (the Texas Business Organizations Code (“BOC”).
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.
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.
Your corporation's name must be distinguishable from the names of other business entities already on file with the Texas 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.
You may reserve a name for 120 days by filing a Name Reservation form (Form 501) with the Texas Secretary of State. The reservation may be filed online through the Texas Secretary of State SOSDirect website, or filed by mail. The filing fee is $40.
Every Texas nonprofit corporation must have an agent for service of process in the state. This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it is sued. The agent must have a physical street address in Texas, not a post office box. Small nonprofit corporations typically name a director or officer to serve as the initial agent. The agent must consent to the appointment.
You legally establish your nonprofit corporation by filing a certificate of formation with the Texas Secretary of State. Your certificate of formation must include:
The Secretary of State has a fillable Certificate of Formation Nonprofit Corporation (Form 202) form for nonprofits on its website which you can use to create your Texas nonprofit corporation.
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 501(c)(3) tax-exempt status from the IRS, your corporation must have certain specific language in its articles, including:
To receive tax-exempt status from the IRS, you'll need to add these clauses to your certificate yourself. You can add the purpose clause in the blank space provided in the Purpose article on the form. The prohibited activities and dissolution clauses can be added in the "Supplemental Provisions/Information" space on the form. You can find sample language to use approved by the IRS in the Instructions for IRS Form 1023-EZ (see Part II).
For more information on IRS requirements for tax exemption, including sample language, consult How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).
The certificate may be filed online through the Texas Secretary of State SOSDirect website or it can be filed by mail. The filing fee is $25.
For additional information on forming your Texas nonprofit corporation, see the Secretary of State’s Nonprofit Organizations FAQs.
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.
Your first board meeting is usually referred to as the organizational meeting of the board. The board should take such actions as:
After the meeting is completed, minutes of the meeting should be created. Set up a corporate records binder to hold the corporation's articles, bylaws, consent forms, minutes, and other important documents. For more information, as well as minutes forms, consent forms, and other resolutions, see Nonprofit Meetings, Minutes & Records, by Anthony Mancuso (Nolo).
Your nonprofit corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee.
Depending on the type of activities your nonprofit intends to carry on and where it is located, it may need to obtain a state business license. For more information, visit the Texas Department of Licensing and Regulation. You can also download the Texas Business Licenses & Permits Guide. Most Texas cities and counties do not require a local business license. Check with your city or county government website to determine your local requirements.
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:
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.
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. See the Texas Comptroller FAQ for more information. Check with your local tax appraisal district if you think your nonprofit is eligible for a property tax exemption.
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. For more information about fundraising registration requirements in all 50 states, see Nonprofit Fundraising Registration Digital Guide, by Ronald J. Barrett and Stephen Fishman.