The Texas Business Organizations Code defines a nonprofit as a corporation that does not distribute any of its income to members, directors or officers of the corporation. A nonprofit corporation may be organized in Texas for any lawful purpose, and Section 501(c)(3) of the Internal Revenue Code authorizes the Internal Revenue Service to confer federal tax exempt status upon non-profit corporations organized and operated for specified exempt purposes. Charitable, educational and religious organization are the most common 501(c)(3) entities, but other types of organizations are eligible as well.
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Search the business entity database on the Texas Secretary of State’s website to check whether the name you want to use is available. The SOS will reject any registration submitted with a company name that is the same or deceptively similar to a name already in use by another Texas company. It is possible to reserve a company name with the SOS for 120 days by filing a Form 501 if you are not ready to register.
Prepare a nonprofit corporation certificate of formation. The certificate of formation is a public document that identifies the purpose of the nonprofit charitable organization and persons responsible for its management. The Texas SOS provides Form 202, a Certificate of Formation template that meets minimum legal requirements; a nonprofit organization must use certain specific language in order to qualify for 501(c)(3) status.
Place IRC Section 501(c)(3) required language in the Certificate of Formation. This required language includes, but is not limited to, the organization’s purpose - specifically one of those listed in the IRC as eligible for tax-exempt status; an initial board of directors consisting of at least three members must be identified; names and addresses of the corporation’s incorporator and registered agent, and nonprofit’s office address must be provided; if applicable, the organization’s governing members should be identified. The Certificate of Formation must also state that any assets remaining after dissolution of the nonprofit shall be distributed to other 501(c)(3) organizations.
File the Certificate of Formation with the SOS. The incorporator must submit the completed Certificate of Formation in duplicate, by mail or fax, to the SOS with the required filing fee. The registration process normally takes two weeks, but can be reduced to approximately 72 hours with payment of an additional fee. The incorporator should order a certified copy of the Certificate of Formation and submit it to the IRS along with the application for a 501(c)(3) federal tax-exemption. The nonprofit corporation comes into legal existence on the date stamped by the SOS on the Certificate of Formation.
Prepare the corporate bylaws. The initial board of directors should prepare and adopt bylaws for the nonprofit corporation at the same time the Certificate of Formation is prepared, or soon thereafter. The bylaws set out the rules that govern the structure, management and operations of the corporation. A signed copy of the bylaws adopted by the board of directors must accompany the nonprofit corporation’s application for a 501(c)(3) the federal tax-exemption.
Convene an organizational meeting of the board of directors to adopt bylaws and transact business. This should be called by the incorporator or a majority of the board of directors soon after the Certificate of Formation is approved by the SOS. In addition to adopting the bylaws, the corporation must elect a president and secretary, and the board of directors should vote to authorize the preparation and filing of an Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, IRS Form 1023.
Apply for a Federal Employer Identification Number (EIN). The IRS does not issue 501(c)(3) tax exemptions to organizations that do not have EINs. An EIN can be obtained by completing an IRS Form SS-4, which is available on the IRS website. The completed Form SS-4 can be completed and filed online, which will result in the instantaneous issuance of an EIN.
Prepare the application for a Section 501(c)(3) tax exemption by filing a Form 1023 with the IRS. This form and detailed instructions on how to fill it in may be found on the IRS website, IRS.gov. The IRS has 270 days to rule on the tax exemption application, but usually takes two to three months to issue a decision. Approval of an application for a federal tax-exemption is done by issuing a “determination letter” to the corporation.
Submit an application to Texas Comptroller of Public Accounts for sales, franchise and hotel occupancy tax exemption. State tax exemptions might also be necessary because a Section 501(c)(3) tax exemption applies to federal taxes only, not state taxes.This application can be done by downloading Form AP-204 from the TCPA’s website, and submitting the completed application after receiving the 501(c)(3) federal tax-exemption. The TCPA application should be based on the federal tax exempt status, and should be accompanied by the IRS determination letter.
Apply to Local Tax Appraisal District for property tax exemptions. Information on how to do this can be obtained from the TCPA, and from the county or municipality in which the nonprofit corporation is located. First obtain verification from the TCPA that the nonprofit corporation is a statewide charitable organization engaged primarily in charitable activities. Download Form 50-299 from the TCPA website and submit the completed form to the local property tax appraisal district.
References & Resources
- Texas C-BAR: Forming a Nonprofit Tax-Exempt Corporation in Texas
- IRS: Applying for IRS 501(c)(3) Tax-Exempt Status
- Texas Secretary of State: Business and Nonprofit Forms -- Formation of Business Entities and Nonprofit Corporations Under the Texas Business Organizations Code
- IRS: Exemption Requirements -- Section
- Texas Comptroller of Public Accounts: Window on State Government -- Exemptions for Qualified Organizations
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