Texans passionate about helping their communities may be curious about how to create a nonprofit organization.
Learning how to set up a nonprofit organization in Texas can be confusing.
It requires navigating many state and federal laws. Our Texas business formation attorneys will review the steps to starting a nonprofit in Texas.
Steps for How to Start a Nonprofit Organization in Texas
Here are general informational steps for how to start a nonprofit in Texas. We strongly advise you to consult with an attorney for more detailed information on this process.
1. Determine the Organization’s Purpose
Before you set up a nonprofit organization in Texas, you must select a specific “purpose” so that it qualifies for tax exemption. The Internal Revenue Code states that acceptable purposes for a nonprofit organization include “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.”
The federal tax code limits a nonprofit’s ability to engage in political activities. If political activities are important to your organization, you may need to structure your organization differently.
2. Name the Organization
You can select any name for your nonprofit as long as it is noticeably different from the names of other Texas organizations. Check with the Texas Secretary of State to see if the name you want is available.
3. Select the Organizer and the Board of Directors
The organizer is an individual who sets up your Texas nonprofit. This person, also known as the incorporator, signs the articles of incorporation.
The board of directors governs the nonprofit. Texas requires a minimum of three directors. Directors owe what is called a “fiduciary duty” to the organization. This generally means that they must act in the best interest of the organization. Failure to do so constitutes a breach of fiduciary duty. Prospective board members should discuss their many duties with an attorney.
4. Choose a Registered Agent
A registered agent is a person or organization who accepts legal papers for the organization. They must have a physical address within Texas. Your nonprofit cannot act as its own registered agent.
An employee, director, or organizer can, however, be a registered agent.
5. Prepare and File the Articles of Incorporation
Preparing and filing the articles of incorporation is what legally establishes your nonprofit. In Texas, you must use Form 202.
Form 202 requires:
- The name of the organization;
- The purpose of the nonprofit organization;
- The name and address of the organization’s organizer;
- The names and addresses of each of the directors;
- The name and address of the registered agent; and
- A dissolution clause.
The dissolution clause says what will happen if the nonprofit dissolves. It is not specifically requested by Form 202. However, it is required for your application for tax exemption. For example, your dissolution clause could state that if your nonprofit were to dissolve, any remaining assets would be used for a charitable purpose as defined by 501(c)(3) of the Internal Revenue Code.
6. Prepare the Bylaws and Conflict of Interest Policy
Bylaws determine how the nonprofit will operate and how decisions will be made.
The bylaws include information such as:
- How board meetings will be conducted;
- The titles and job duties of the officers; and
- How elections for the officers will be conducted.
The officers take care of the day-to-day business of the organization. In Texas, a minimum of two officers are required: a president and a secretary.
A conflict of interest policy protects the organization from interference from an individual’s personal or financial interests. Directors and officers cannot act in the organization’s best interest if they have a personal stake in the nonprofit’s financial decisions.
7. Hold the First Meeting of the Board of Directors
The initial meeting of the board is where the nonprofit organization takes its first steps as a legal entity.
At the initial meeting, the board of directors must:
- Pass the bylaws,
- Elect the officers,
- Select the accounting year and tax year for the organization,
- Transact the initial business of the organization, and
- Approve the applications for tax exemption with the IRS and Texas Comptroller.
Minutes must be taken. These minutes should be kept with a copy of the bylaws, the conflict of interest policy, and the articles of incorporation.
8. Get an Employer Identification Number
An employer identification number (EIN) is a number assigned to an organization for federal tax purposes. Once your organization is legally formed, you can apply for an EIN on the IRS website. It will be issued immediately. Print a copy of the EIN for your records.
9. File Applications for Tax Exemption
An important step in starting a nonprofit in Texas is to apply to the IRS for tax-exempt status. You must file either IRS Form 1023 or IRS Form 1023-EZ. An IRS worksheet can help you select the right form.
After receiving the IRS tax exemption, you can apply for exemption from Texas state taxes, such as franchise tax and sales tax. Complete and file Form AP-204, “Texas Application for Exemption – Federal and All Others,” with the Texas Comptroller. Include the IRS determination with your application.
10. Other Considerations
Depending on your organization, you may need business licenses. The Texas Department of Licensing and Regulation lists license types and the application process for each.
Texas does not require a nonprofit to register to solicit donations unless its activities involve law enforcement, public safety, or veterans’ services. If your organization will solicit donations outside of Texas, however, it may need to register in other states.
Annual Reporting and Recordkeeping Requirements
Nonprofit organizations are subject to regular reporting requirements.
They must file a periodic report with the state and Form 990 with the IRS. Additionally, a nonprofit must keep and maintain its books and records in a particular way. Depending on the type of nonprofit, there may be other ongoing legal obligations.
Contact The Hunnicutt Law Group Before Starting Your Texas Nonprofit
Starting a nonprofit in Texas requires you to navigate many state and federal laws. It is important to consult with an attorney to understand how to set up a nonprofit organization in Texas.
We are located in Dallas, Texas, and we offer video conferencing consultations.