A nonprofit corporation is created by filing a certificate of formation with the secretary of state in accordance with the Texas Business Organizations Code ("BOC"). "Nonprofit corporation" means a corporation no part of the income of which is distributable to members, directors, or officers [BOC, Section 22.001(5)]. A nonprofit corporation may be created for any lawful purpose, or purposes permitted by the BOC. Not all nonprofit corporations are entitled to exemption from state or federal taxes.
Unincorporated Nonprofit Associations: Section 252.001 of the BOC defines an unincorporated nonprofit association as an unincorporated organization consisting of three or more members joined by mutual consent for a common, nonprofit purpose. All unincorporated nonprofit associations, whether or not the entities are tax-exempt, are subject to the provisions of the Uniform Unincorporated Nonprofit Association Act, Chapter 252 of the BOC.
The Act addresses a limited number of major issues relating to nonprofit associations; namely, the authority of the nonprofit association to acquire, hold, and transfer property in its own name; the authority to sue and be sued as a separate legal entity; and the contract and tort liability of an association's officers and its members. If you need further information regarding these provisions or how they might affect your association, you should contact your own legal counsel.
Important FAQs
1. What is a nonprofit corporation?
A “nonprofit corporation” is a corporation in which no part of the income is distributable to members, directors, or officers. A nonprofit corporation is created by filing a certificate of formation with the secretary of state. A nonprofit corporation may be created for any lawful purpose, which purpose must be stated in its certificate of formation.
2. Is a nonprofit corporation a tax-exempt entity? If not, how do I become tax-exempt?
A Texas nonprofit organization—whether a corporation or an unincorporated association—is not automatically exempt from federal or state taxes. To become exempt, the organization must meet certain requirements and apply with both the IRS and the Texas Comptroller of Public Accounts.
3. How do I form a “501(c)(3)” corporation?
The designation “501(c)(3)” refers to a specific federal tax provision only. If you need information regarding a federal tax provision or a tax provision impacts your certificate of formation, you should contact your own tax counsel, attorney, or the IRS. The secretary of state’s Form 202 meets minimum state law requirements but does not include any additional statements that the IRS might require for tax-exempt status.
4. I’m filing a certificate of formation for a nonprofit corporation, and I have to decide whether the corporation will have members. What is a member?
Many nonprofits use the term “member” synonymously with “supporter” or “donor.” Separate from this fundraising use, however, the Texas Business Organizations Code provides for a nonprofit corporation with a formal membership structure. Pursuant to section 1.002(53) of the Texas Business Organizations Code, a “member” of a nonprofit corporation is “a person who has membership rights in the nonprofit corporation under its governing documents.”
Members of a nonprofit corporation are similar to shareholders of a for-profit corporation in that both members and shareholders may have significant rights with respect to internal corporate governance. Unlike shareholders, however, members of a nonprofit corporation are typically not owners and are not issued stock. When forming a nonprofit corporation, you must determine whether the corporation will have members, and if so, who will govern the corporation—the members, a board of directors, or both.
A nonprofit corporation is presumed to have members. If you are forming a nonprofit corporation without members, the certificate of formation must include a statement to that effect.
5. Can one person be the sole director and officer of a nonprofit corporation?
No. The Texas Business Organizations Code requires a nonprofit corporation to have at least three directors, one president, and one secretary. The same person cannot be both the president and secretary. Officers and directors must be natural persons, but may be known by other titles.
6. Can a nonprofit corporation pay a salary to its officers, directors and/or employees?
Yes. Any corporation may pay reasonable compensation for services rendered to the corporation. Note that the Secretary of State does not determine what is considered reasonable compensation. A paper presented in 1993 at the IRS Continuing Education Program for Exempt Organization Specialists discusses reasonable compensation
7. Can a nonprofit corporation give political contributions?
There are restrictions on political contributions by nonprofit corporations. For information, on this topic, you may wish to contact your private attorney.
8. Who has authority to investigate the activities of a nonprofit corporation?
The Texas Attorney General has statutory authority to (1) investigate charities that operate as nonprofit corporations, and (2) inspect the books and records of all corporations, including nonprofit corporations. The secretary of state has no such authority. Additionally, the IRS can revoke a nonprofit corporation’s tax exemption for violations of federal tax laws.
9. Are the books and records of a nonprofit corporation available for inspection?
Section 22.351 of the Texas Business Organizations Code gives a member of a nonprofit corporation, on written demand, the right to examine and copy the corporation’s books and records. The member, or the member’s agent, accountant, or attorney, may examine and copy these records at any reasonable time and for a proper purpose. Section 22.352 also requires a nonprofit corporation to maintain financial records in accordance with generally accepted accounting principles; the board of directors is required to prepare or approve an annual financial report for the preceding year.
Additionally, section 22.353 requires certain nonprofit corporations to make all records, books, and annual reports of financial activity available to the general public for inspection and copying. However, this section does not apply to (1) corporations that solicit funds only from their members; (2) corporations that do not intend to solicit and do not actually receive contributions in excess of $10,000 during a fiscal year from sources other than their members; (3) proprietary schools; (4) religious institutions; (5) trade associations or professional associations whose principal income is from dues and member sales and services; (6) insurers; or (7) alumni associations of public or private institutions of higher education.
Under certain circumstances, a nonprofit corporation’s books and records are also available to the public under the Texas Public Information Act (chapter 552 of the Government Code). The Act defines “governmental body” to include the “part, section, or portion of an organization, corporation, commission, committee, institution, or agency that spends or that is supported in whole or in part by public funds.”
10. Can I obtain a copy of a nonprofit corporation’s IRS Form 990 from the secretary of state?
No. Although organizations filing Form 990-PF must submit a copy to certain state attorneys general, nonprofit corporations are generally not required to file Form 990 with the Texas attorney general or the secretary of state. The IRS provides information about how to obtain copies of Forms 990, exemption applications, and related tax filings.
11. Does a foreign nonprofit corporation have to register to transact business in Texas if its only contact with the state is solicitation of funds or donations?
A nonprofit corporation that actively solicits funds in Texas may be “transacting business” in Texas and should file an Application for Registration; however, if the corporation’s contacts with Texas are only through interstate commerce (for example, by mail or by telephone) or independent contractors, then the corporation is probably not “transacting business” in Texas.
However, regardless of the manner of solicitation, an out-of-state nonprofit corporation may be required to register with the secretary of state in order to participate in a state employee charitable campaign.
FAQs for Unincorporated Nonprofit Associations
1. What is an unincorporated nonprofit association?
An unincorporated nonprofit association is an unincorporated organization consisting of three or more members joined by mutual consent for a common nonprofit purpose. Unlike nonprofit corporations, unincorporated nonprofit associations do not file certificates of formation with the secretary of state.
2. Does an unincorporated nonprofit association have to file anything with the secretary of state?
No. An unincorporated nonprofit association may, but is not required to, file an appointment of an agent for service of process. In addition, the association may, but is not required to, file a statement of authorization as to real property with the county clerk.
3. Is an unincorporated nonprofit association a tax-exempt entity? If not, how do I become tax-exempt?
A Texas nonprofit organization—whether a corporation or an unincorporated association—is not automatically exempt from federal or state taxes. To become exempt, the organization must meet certain requirements and apply with both the IRS and the Texas Comptroller of Public Accounts.
Seek Professional Advice
Should you have any questions or concerns about the Legal Issues addressed in this blog post, please reach out to Derek Saunders, Keith Strahan, or Richard Armstrong of our firm, shown here: https://lfbrown.law/our-team
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