What is a nonprofit entity?
A nonprofit corporation is one that may not pay dividends or any part of its income to its members, directors or officers. It may, however, pay reasonable compensation to its members, directors, or officers for services rendered to the corporation.
A corporation formed for the purpose of operating a nonprofit institution may be formed and governed in Texas only as a nonprofit corporation under the Texas Business Organization Code. Formation as a for-profit corporation is not an option. This applies to institutions such as those devoted to charitable, benevolent, religious, patriotic, civic, cultural, missionary, educational, scientific, social, fraternal, athletic, or aesthetic purposes.
Is tax-exempt status automatic?
No. In Texas a nonprofit corporation does not automatically become tax-exempt upon its formation. Tax exempt status is granted separately by the IRS and by the Texas Comptroller of Public Accounts. For basic information, visit their websites:
Obtaining tax exemptions is not a simple matter of filling in a few blanks on some forms. The advice of an attorney and a CPA are essential.
How do I form a nonprofit corporation?
A nonprofit corporation is formed by filing a certificate of formation with the Texas Secretary of State. It may, but need not, have members, but it must have at least three directors and must elect at least a President and a Secretary.
The members of a religious society, a charitable, benevolent, literary, or social association, or a church may incorporate as a nonprofit corporation with the consent of a majority of its members, who would then authorize the organizers to execute the certificate of formation.
How do I file a certificate of formation?
The certificate of formation can be filed by filling out a form available from the Secretary of State and submitting that form to the Secretary of State along with a filing fee ($25.00 as of February 2010).
Can it be formed for any purpose?
In general, it may be formed for any lawful purpose, but to obtain tax exemptions it must be able to describe its purpose in much more detail and that purpose must fit within those prescribed by state and federal law as qualifications for tax-exempt status.
Are any purposes or activities prohibited?
In general, any business entity formed under the Texas Business Organizations Code may not engage in a business or activity that is expressly unlawful or prohibited by Texas law or cannot lawfully be engaged in by that entity under Texas law, or operate as a bank, trust company, savings association, insurance company, cemetery organization (except as authorized by Chapter 711, 712, or 715 of the Texas Health and Safety Code) or abstract or title company governed by Title 11 of the Texas Insurance Code.
Texas law specifies certain activities that nonprofit corporations are prohibited from engaging in.
What information do I need to complete the certificate of formation?
In its certificate of formation, a nonprofit corporation must designate the following:
- The corporation's name and the type of entity (note: there is no blank for the type of entity; the form's title indicates the type, in this case a nonprofit corporation).
- The name of its registered agent for service of process and its registered office, which must be an address at which the registered agent may be personally served during normal business hours.
- Whether it will have members and directors. It can have no members or any number of members, who can be divided into any number of classes. If it has members, state:
- how many, with names, addresses and telephone numbers.
- Whether the members will be divided into classes, and if so, a description of each class, the qualifications and rights (including voting rights) of each class, and how the members of each class will be elected or appointed.
- if it will have directors, the names and addresses of at least three persons to serve as the initial directors.
- whether the corporation will be managed by the directors or the members.
- The nonprofit's purpose. Note that to qualify for filing with the Secretary of State, the certificate only needs to state the purpose generally, but to facilitate the application for tax-exempt status, more detail may be needed. Additional space is available on the form for this supplemental information about purpose.
- The entity's duration, if it will not be perpetual. The law presumes that it will be perpetual unless the certificate of formation specifies a shorter duration.
- The name and address of the organizer, who must sign the certificate.
Basic rules and procedures for operating a nonprofit corporation in Texas
- Once the articles of formation are filed, an organizational meeting should be held to adopt bylaws and take other actions necessary to file for tax-exempt status. Officers should be elected at this meeting. The officers of a corporation must include at least a president and a secretary and may include one or more vice presidents, a treasurer, and other officers and assistant officers as considered necessary. A person may hold any two or more offices, except the offices of president and secretary. The term of office and manner of electing officers may be specified in the bylaws but the term of an officer may not exceed three years.
- A dividend may not be paid to, and no part of the income of a nonprofit corporation may be distributed to, the corporation's members, directors, or officers.
- The corporation may do the following:
- pay reasonable compensation to it members, directors, or officers of the corporation for services rendered; and
- lend money or provide other benefits, distributions or assistance to its members, directors and officers under limited circumstances.
- Members of a nonprofit corporation are not personally liable for any debts, obligations or liabilities of the corporation.
- A corporate meeting must be held at least annually, or more frequently if required by the bylaws. If the directors fail to call an annual meeting when required, any member may call for a meeting by sending a demand in writing to an officer by registered mail. Remedies are available if the meeting is not held.
- Adequate and timely written notice of all meetings must be given to all members, except as provided in the bylaws.
- If the corporation has directors, the initial directors will serve until the first annual meeting, at which time new directors can be elected. The directors can be grouped into classes. The bylaws can prescribe how directors can be classified, removed or elected. Unless the certificate of formation or the bylaws state otherwise, a director may resign at any time by giving written notice to the corporation.
- Texas law prohibits a nonprofit corporation from lending to a director and prescribes other limitations on certain kinds of transactions with directors, officers and members. Engaging in certain activities can result in a loss of tax-exempt status and consequently, may lead to substantial tax liability. The corporation must not engage in any transactions with its members, officers or directors without first obtaining advice from an attorney.
- A nonprofit corporation must file a report with the Secretary of State at least once every four years, The report must state:
- the name of the corporation;
- the state or country under the laws of which the corporation is incorporated;
- the address of the registered office of the corporation in this state and the name of the registered agent at that address;
- if the corporation is a foreign corporation, the address of the principal office of the corporation in the state or country under the laws of which the corporation is incorporated; and
- the names and addresses of the directors and officers of the corporation.
Failure to file this report may subject the corporation to involuntary termination.
- Financial records and reports. Nonprofit corporations must maintain current and accurate financial records with complete entries for each financial transaction of the corporation, including income and expenditures, in accordance with generally accepted accounting principles. Using these records, the board of directors must prepare or approve an annual financial report containing the following:
- a statement of support, revenue, and expenses;
- a statement of changes in fund balances;
- a statement of functional expenses; and
- a balance sheet for each fund.
This report must conform to accounting standards as adopted by the American Institute of Certified Public Accountants.
The corporation must maintain annual records for a given fiscal year for a period of three years following the close of that fiscal year and the corporation's financial records must be made available to the public for inspection and copying during regular business hours. It may charge a reasonable fee for making copies. Certain types of nonprofit corporations are exempt from these requirements.
Failure to comply with these requirements is a misdemeanor.