Texas Nonprofit 501(c)(3)
A 501(c)(3) nonprofit starts as an organization with a charitable purpose, then moves through state formation and federal tax-exemption work. Keep those questions separate: first create the nonprofit structure, then apply for recognition of exemption with the Internal Revenue Service.
The Texas nonprofit form and filing fee, the state tax exemption process, and foreign nonprofit registration are covered below.
Forming a Texas 501(c)(3) Nonprofit
To qualify as a 501(c)(3) tax-exempt organization, the nonprofit must exist for one or more exclusively charitable purposes. The listed purposes include charitable, religious, educational, scientific, literary, public-safety testing, amateur sports, and prevention of cruelty to animals and children.
Common benefits of 501(c)(3) status can include federal and state corporate income tax exemption, eligibility to apply for grants and other allocations reserved for 501(c)(3) organizations, discounted postage rates, and public credibility.
Those benefits depend on completing the state and federal steps correctly. A nonprofit should not describe itself as tax exempt just because the state entity has been formed.
Steps Before the IRS Application
Start with the board of directors. The board oversees the nonprofit's operations, adopts governing documents, and records the first official actions.
A Texas nonprofit corporation managed by a board of directors must have at least three directors. Each director must be a natural person, and there is no residency requirement.
A Texas nonprofit corporation is formed by filing Form 202, the Certificate of Formation for a Nonprofit Corporation, with the Texas Secretary of State. The filing fee is $25. The certificate states the name, registered agent and registered office, directors, whether the corporation will have members, its purpose, an initial mailing address, and the organizer.
Before filing, choose a name that fits the nonprofit's purpose and can be used consistently in state, federal, banking, donor, and public-facing records.
A Texas nonprofit corporation's name does not have to include an organizational designation, but it must be distinguishable in the Secretary of State's records from existing Texas and registered foreign entity names and from name reservations and registrations. It also may not falsely imply a governmental affiliation. The Secretary of State gives a preliminary, non-final name-availability determination by phone at (512) 463-5555 or by email.
Formation Record and Charitable Purpose
The state formation document is needed before the organization applies for a tax ID, EIN, and 501(c)(3) recognition.
For 501(c)(3) purposes, the formation document should include language describing the organization's purpose and dissolution process. The purpose should match the recognized charitable purposes, and the dissolution language should explain what happens to the organization's assets when it winds up.
Form 202 does not contain the language needed to obtain tax-exempt status at the state or federal level. Texas allows a general purpose clause, but the Texas Tax Code and the Internal Revenue Code may require a more specific purpose statement, which can go in the purpose and supplemental provisions sections of the certificate.
Under Texas law, a nonprofit corporation's remaining property after winding up is distributed only for tax-exempt purposes to one or more organizations exempt under Section 501(c)(3) or described by Section 170(c)(1) or (2) of the Internal Revenue Code, unless the certificate of formation provides otherwise. A corporation that will distribute its property another way must describe the manner of distribution in the certificate.
Bylaws and Conflict-of-Interest Policy
Bylaws are the nonprofit's internal operating rules. They should cover basic procedures such as meeting schedules, voting procedures, quorum requirements, amendment procedures, and other governance rules.
The conflict-of-interest policy is another governance step. The policy is meant to prevent board members from personally, financially, or otherwise benefiting from board decisions when a conflict is present.
Both documents should be adopted at the first official meeting of the organization. Keep the minutes, bylaws, conflict policy, board list, and formation records together.
Registered Agent, EIN, and IRS Form 1023
Handle the registered-agent step before the federal application. Texas filing entities must maintain a registered agent and registered office in Texas, and the registered office must be a physical Texas address where service of process and official notices can be received during business hours.
An Employer Identification Number is the organization's federal tax identification number. The EIN is needed before the organization can open a bank account, hire employees, apply for 501(c)(3) status, and complete other setup steps.
To apply for 501(c)(3) recognition, use IRS Form-1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Form-1023 must be filed within 27 months of the organization's creation, and an IRS determination letter may take about 180 days after submission.
State Tax Exemption and Ongoing Compliance
A Texas nonprofit corporation is subject to the state franchise tax unless an exemption is granted.
A nonprofit exempt under Section 501(c)(3) can apply to the Texas Comptroller for exemption from franchise tax and sales tax based on its federal exempt status. The application is Form AP-204, Texas Application for Exemption - Federal and All Others, and it asks for a file-stamped copy of the formation documents.
Ongoing nonprofit compliance can include IRS Form 990 and the Texas reports and records described below.
The Texas Secretary of State may require a nonprofit corporation to file a periodic report, Form 802, not more often than once every four years, and notice of the due date goes to the corporation's registered office. Failing to file when requested results in involuntary termination. A nonprofit corporation must also keep its records, books, and annual reports of financial activity at its registered or principal office for three years after the close of each fiscal year and make them available for public inspection, unless Section 22.355 of the Business Organizations Code exempts it.
Foreign Nonprofits
Foreign nonprofits that want to move into, or open a branch in, the United States should confirm that their work is legal in the United States and in the state where they plan to operate.
Legal or regulatory problems in the nonprofit's country of origin can delay or complicate expansion. A nonprofit whose activity is not legal under federal law may also face denial or practical barriers.
A foreign nonprofit corporation that will operate in Texas registers with the Texas Secretary of State.
The registration is Form 302, Application for Registration for a Nonprofit Corporation or Cooperative Association, and the filing fee is $25. A foreign entity that has transacted business in Texas for more than ninety days without registering owes a late filing fee equal to the registration fee for each full or partial calendar year.