Nonprofit Corporation

What is a Nonprofit Corporation?

A nonprofit corporation is an organization formed to act as an artificial entity or artificial person to carry on, or conduct, or engage in an activity exclusively for charitable, religious, scientific,  educational, or social welfare promotional purposes. The most common nonprofit corporations seek exemption from federal income tax under Section 501(c)(3) or Section 501(c)(4) of the Internal Revenue Code of 1986, or other corresponding provisions of United States law.

What are the basic types of Nonprofit Corporations?

There are two basic types of nonprofit corporations in Texas: those with members, and those without members.  Nonprofit corporations must have three directors (as distinguished from for-profit corporations which may have only one director).  The Certificate of Formation and Governing Documents for nonprofit corporations can be fairly complex because they must be approved by the Internal Revenue Service in order to qualify for an exemption from federal income tax under Section 501(c)(3) or Section 501(c)(4) of the Internal Revenue Code.  The first step entails the preparation of the Certificate of Formation which must be filed with and approved by the Texas Secretary of State.

Concerns related to Texas Nonprofit Corporations?

However, merely securing the approval of the Texas Secretary of State on the adequacy of the Certificate of Formation does not mean that the Internal Revenue Service will approve the nonprofit corporation’s exemption from federal income tax!  The Texas Secretary of State will file the document if it complies with applicable Texas law.  But the Texas Secretary of State takes absolutely no position whatsoever on whether or not the entity may qualify for an exemption from federal income tax under Section 501(c)(3) or Section 501(c)(4) of the Internal Revenue Code. But this initial filing is a necessary prerequisite in the federal income tax exemption quest process.
 

How do I Establish a Texas Nonprofit Corporation?

Obtaining the nonprofit corporation’s exemption from federal income tax is a very time consuming process that may take from many months to almost a year.  And it requires retaining a certified public accountant who is familiar with nonprofit corporation filings to prepare and present the very detailed documentation required by the Internal Revenue Service.  I cannot overemphasize the rigorous nature of pursuing exemption from the federal income tax.  Many organizations which do not truly qualify as "nonprofit entities" attempt to secure this classification for less than honorable purposes.  In turn, the Internal Revenue Service must closely regulate, monitor, and police all of these filings very carefully.

Your certified public accountant who is experienced in nonprofit corporations must first be consulted before the entity is initially organized.  His or her counsel will be invaluable on the issue of whether or not they believe that the entity can ultimately qualify for exemption from the federal income tax.  I assist clients in the organization of their Texas nonprofit corporations.  However, I do not provide the required advice and tax counsel offered by certified public accountants in this very specialized arena.