If you’re passionate about helping others and have an idea to serve your community, starting a nonprofit is a great way to turn your vision into a reality. There are many different types of nonprofits – religious, educational, human service oriented, animal welfare, and more. What all nonprofits have in common is a focus on helping others and benefiting their community.
When you are ready to start your nonprofit, plan to incorporate and apply for 501(c)(3) status, as these are important steps to fully achieve your goals. As a 501(c)(3) nonprofit, you will be able to apply for grants and accept donations, be exempt from federal corporate income tax, state sales tax, property tax, and limit the liability of your organization’s officers and directors. Most importantly, you will gain credibility and legitimacy for your cause, instilling the public with confidence in your organization, and giving donors the opportunity to write off donations as tax deductible.
Here are seven steps to start you on your path to forming a nonprofit corporation in the state of Texas.
- Choose the initial directors for your nonprofit
You must have at least three directors on your board (unless your nonprofit is managed by members instead of directors). These directors are charged with the task of management and oversight of the non-profit. Carefully consider individuals who will be trustworthy, who share your vision for the non-profit, and are willing to put in the time to provide oversight and management.
- Choose a name for your nonprofit corporation
The name of your nonprofit corporation cannot be the same as, deceptively similar to, or similar to the name of any existing domestic or foreign entity, or any name reservation or registration filed with the Secretary of State. You can email or call the Secretary of State’s office to request a preliminary name availability check.
- Prepare and file your nonprofit certificate of formation
Create your nonprofit entity by filing a certificate of formation with the Texas Secretary of State. Your certificate of formation must include basic information such as:
- the name of the corporation
- that the entity being formed is a nonprofit corporation
- the purpose or purposes for which the entity is formed
- the period of duration, if the entity is not formed to exist perpetually
- the street address of the initial registered office of the entity and the name of the initial registered agent at the office
- the name and address of each organizer for the entity
- if the nonprofit is to have no members, a statement to that effect
- if management is to be vested in the nonprofit’s members, a statement to that effect
- the number of initial directors and the names and addresses of those directors or, if management is vested solely in members, a statement to that effect, and
- if the nonprofit is to be authorized on its winding up to distribute assets in a manner other than as provided by BOC §22.304, a statement describing the manner of distribution.
The IRS will examine your certificate of formation when you apply for 501(c)(3) status to ensure that it complies with their guidelines. Accordingly, it is important to include specific language that will be accepted by the IRS related to your non-profit purpose and future dissolution of the entity. It is a good idea to consult with an attorney about what type of language your non-profit entity should use in the certificate of formation.
- Prepare bylaws for your nonprofit corporation
Before you file your certificate of formation, you’ll need to have bylaws that comply with Texas law. Your bylaws contain the rules and procedures your corporation will follow for holding meetings, electing officers and directors, and taking care of other corporate formalities required in Texas. Your bylaws do not need to be filed with the state — they are your internal operating manual. However, your bylaws will be reviewed by the IRS for compliance with their guidelines. Accordingly, bylaws should also include specific provisions necessary to obtain 501(c)(3) status, including a comprehensive conflicts of interest policy.
- Apply for 501(c)
Like others, you may be most familiar with 501(c)(3) nonprofits, including charities and foundations. 501(c)(3) nonprofits apply using Form 1023 or Form 1023-EZ. Review the criteria for each application and make sure you meet the eligibility requirements set out by the IRS. Other types of nonprofits, including 501(c)(4)s (social welfare organizations) and 501(c)(6)s (business related groups), apply using Form 1024. After reviewing and approving your application, the IRS will return a Determination Letter officially recognizing your exemption. This process will take several months.
- Hold a meeting of your board of directors
Your first board meeting is usually referred to as the organizational meeting of the board. The board should take such actions as:
- approving the bylaws
- appointing officers
- setting an accounting period and tax year, and
- approving initial transactions of the corporation, such as the opening of a corporate bank account.
After the meeting is completed, be sure to create minutes that accurately record the actions taken by the board.
- Set up a corporate records binder
You should set up a corporate records binder for your nonprofit to hold important documents such as your certificate of formation, bylaws, and minutes of meetings.