How to Form a Texas Nonprofit Corporation

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.

1. Choose directors for your nonprofit.
2. Choose a name for your nonprofit.
3. Appoint a registered agent.
4. File Texas nonprofit Certificate of Formation.
5. Prepare nonprofit bylaws.
6. Hold a meeting of your board of directors.
7. Obtain an employer identification number (EIN).
8. Obtain business licenses.
9. File Form 1023 for federal tax exemption.
10. Apply for Texas tax exemptions.
11. Complete other state reporting and registration requirements.

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.

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.

3. Appoint a Registered Agent

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.

4. Prepare and file your nonprofit certificate of formation

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 name of the corporation
• the street address of the initial registered office of the entity and the name of the initial registered agent at the office
• the names and addresses of the initial directors and the names and addresses of those directors, or a statement that management is vested solely in members
• whether or not the nonprofit will have members
• the purpose or purposes for which the nonprofit is formed--this must comply with IRS requirements (see below)
• the name and address of each organizer for the corporation, and
• the effective date of the certificate--ordinarily upon filing.

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:

• a statement of purpose that meets IRS requirements
• statements that your nonprofit will not engage in activities unrelated to its exempt purposes or in prohibited political or legislative activity, and
• a dissolution clause dedicating the corporation's assets to another 501(c)(3) organization or to the government upon dissolution.

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.

5. 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.

For more information on bylaws, see Nolo's article Nonprofit Bylaws. For help creating your bylaws, see Nolo's book How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).

6. 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, 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).

7. Obtain an EIN

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.

8. Obtain Business Licenses

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.

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:

9. 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.

10. 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. 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.

11. 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. For more information about fundraising registration requirements in all 50 states, see Nonprofit Fundraising Registration Digital Guide, by Ronald J. Barrett and Stephen Fishman.