How to Form a Texas Nonprofit Corporation in 2023

What is a Nonprofit Corporation?

A nonprofit and for-profit corporation both have similar “nuts and bolts,” so to speak. Both businesses have a board of directors, CEOs, bylaws, annual board meetings, and the like.

But what makes a nonprofit stand out is its purpose. A business corporation typically organizes for financial gain; a nonprofit exists not to make money but to further a cause or reach a goal. Additionally, a business corporation gains investors by offering stock, which has the incentive of dividends and financial gain. Nonprofit corporations solicit contributions that don’t generate any income for those investors.

Well-known nonprofits include groups like Doctors Without Borders, Alcoholics Anonymous, and even your local YMCA.

It’s important not to confuse “nonprofit” with “no income.” Most nonprofits generate income from donations or day-to-day services. The distinction is that nonprofits use 100% of their income to pay expenses and reinvest in their cause. For example, the YMCA uses member dues and community donations for exercise programs, youth sport development, and maintaining their equipment and facilities. They also pay their employees.

Because of this, nonprofit corporations may apply for and receive a tax-exempt status (typically a 501(c)(3) designation), eliminating the corporation’s responsibility for income taxes at the federal and state levels.

Should you form one?

Before you dive into the rest of this guide, you should do a little soul-searching: should you even form a nonprofit in Texas? The goal is a noble one, but it certainly isn’t for everyone. And some concepts simply aren’t right for the nonprofit sector.

Here are some questions to ask:

• Will I be able to convince others to buy into this cause? How hard will it be to attract donors?
• Are there other existing nonprofits with the same goal?
  • If so, do they operate in Texas? Nationwide? Should I form a local chapter of their nonprofit instead?
  • Can I further this cause better or differently than they are?
• Can I hire employees for this cause, or will I rely on volunteers? How will I successfully recruit their help?

If you find yourself stumped by any of those questions, you may want to step back and get some help…or simply do some more thinking before diving in. But if you have answers to most of those questions, then you’re well on your way to starting a Texas nonprofit organization.

Starting a Texas Nonprofit: Step by Step

Technically, the process for creating a Texas nonprofit entity is pretty simple. It’s really just a matter of picking a few people and filing some paperwork (it’s the requirements immediately after forming the nonprofit that get complicated).

1. Pick & Claim a Name

Choosing a name is one of the most crucial decisions for starting your business. You want to pick a name that’s memorable, likable, and most importantly, compliant with Texas state law.

Texas has pretty simple laws for nonprofit names:

• Your name must include one of the following words: “corporation,” “company,” “incorporated,” or “limited” (their abbreviations are permitted, too)
• Your name cannot state or imply government affiliation
• Your name must match the purpose stated in your Certificate of Formation, and your name cannot state a purpose that is prohibited by law
• Names containing “lotto” or “lottery” are prohibited
• Your name must be “distinguishable in the records” of the Secretary of State, or distinct from the names of other entities in use in the state

If you want more information on Texas nonprofit names, check out the General Provisions Relating to Names of Entities section of the Business Organizations Code.

As a result, you have a lot of leeway to pick a name that will resonate with your target audience, potential donors, and of course, with you. The ideal Texas nonprofit name describes what the organization does, sounds good when said out loud, and just “sticks” in the minds of people who see it.

Whenever you pick a potential name, you should check whether it’s available with a Taxable Entity Search. Typically, if you type in your desired name here and no exact matches show up, your name is available to use. This seems like a very basic step, but it’s crucial to streamlining your filings.

Once you nail down an available name that you like, you can reserve it using the Application for Reservation or Renewal of Reservation of an Entity Name form. This optional filing costs $40 to submit, but once it’s approved, your name will be protected for 120 days. That gives you plenty of time to prepare other business documents without losing your name to another business or nonprofit.

You can learn more through our guide on how to reserve a Texas business name.

2. Assemble your initial board

A nonprofit corporation is only as impactful as the people leading it. That’s why your initial board of directors is extremely important; you’ll want to pick a team of people that are just as passionate about your cause as you are.

More importantly, it’s helpful to choose a group with complementary strengths. For example, a medical outreach group might have a board of directors with three doctors, a nurse, a financial expert, a creative visionary, and a lawyer. The right board of directors will help your nonprofit thrive.

Texas doesn’t have a bunch of rules about who can serve on the board. The only explicit requirement is that your board must have at least three directors. As long as you have the minimum three directors, your nonprofit can set out how many extra directors you’ll have (and their qualifications) in your company bylaws. You can also dictate how each director is appointed, how long they’ll serve, how they’ll resign, how you’ll replace them, and more.

3. Appoint a registered agent

Every Texas entity—nonprofits, corporations, and LLCs alike—must appoint a registered agent. This individual accepts “service of process” from the state on your behalf. Basically, if the state ever needs to notify you regarding a lawsuit or an upcoming annual report due date, they’ll contact your registered agent. The agent forwards that notice to you.

Texas has pretty lenient criteria for a nonprofit’s registered agent, as found in The Business Organizations Code:

• Every entity that registers with the Secretary of State (both domestic and foreign) must appoint a registered agent
• The agent must be an individual resident of the state OR a third-party business entity with authority to operate in Texas
• The individual or entity must sign a written consent to their appointment
• An agent must be continuously maintained

So you might ask, “Can I serve as my nonprofit’s registered agent?” Technically, you can. But we don’t recommend it. That puts your personal details (and often private details like your address and primary email) on the public record. You’ll also be busy running your nonprofit and pursuing your goals; you won’t want to tie yourself down to a registered address (especially for a tedious thing like service of process). We recommend appointing an individual you trust.

Or, if you prefer, you can hire a registered agent service instead. For a small annual fee, these services will act as your agent. That frees you up to focus on running your nonprofit.

4. File your Certificate of Formation

Up until now, your nonprofit has just been an idea; it’s not recognized by the state government. Technically, businesses don’t “exist” until they file the appropriate paperwork. For Texas nonprofits, that means filing the Certificate of Formation.

This three-page document requires some foundational information about your nonprofit. Here’s the data you’ll need to have on hand:

• Your nonprofit’s name
• Name and address of your chosen registered agent
• Name and address of each initial director
• Whether or not the nonprofit will have members
• A statement of purpose for the nonprofit
• Inclusion of the IRS’s suggested language for receiving tax-exempt status (optional, but highly recommended)
• Initial mailing address for the nonprofit
• Any supplemental provisions you wish to include
• Name and address of the organizer
• Effective date of the filing
• Signature of organizer

All told, this form is pretty simple to complete; all you really have to do is fill out the requested information, and you’ll be set to go. If you’ve made it this far into this guide, you probably already have all of this information on hand. Even the section for tax-exemption is pretty simple (provided you follow the IRS’s recommendations); it’s mostly boilerplate text that you have to include in your Certificate.

If you prefer, you can file this document online instead. This speeds up processing considerably, but it costs an extra $1 on top of the base $25 filing fee.

Processing speed: currently severely delayed; online filings take 10-12 business days while expedited mail or fax orders take as much as 72 days

Expedited processing: $25 extra, which reduces the delay for paper filings to approximately 12-14 business days

Prepare for & Hold Your First Board Meeting

After your Certificate of Formation form is complete, it’s time to truly get your nonprofit’s activities underway. And that means it’s time for the first board meeting.

No two board meetings will look exactly the same; after all, every nonprofit has different tasks to accomplish. Texas does require you to have regular meetings, but the exact specifics for your meetings—the who, the when, the where, the how—will be dictated by your bylaws.

For example, at each meeting your bylaws might require your president and CFO to report on the recent accomplishments and financial standing of the nonprofit. Other nonprofits will take a different approach. For more information on your meetings, please consult the Management subchapter of the Business Organizations Code.

Your very first board meeting, however, will look a bit different. Here’s what you’ll need to accomplish:

• Draft and approve the nonprofit’s bylaws: The bylaws dictate exactly how your nonprofit will be run. This includes a detailed rundown of your corporate purpose, how your board will be selected and replaced, how you’ll raise funds, how you’ll hire employees or solicit volunteers, and much more (including a provision for how to amend the bylaws). To save time, you may choose to write a draft before the meeting and revise it when your full board is present. The important thing is that the board approves the final bylaws, making them the governing document for your nonprofit.
• Draft and approve a conflict of interest policy: Occasionally, one of your nonprofit’s contributors will have personal affairs that intersect with the activities of your nonprofit. A conflict of interest policy dictates exactly what happens in those situations, protecting both the nonprofit and the individual contributor.
• Appoint someone to take minutes at each meeting: Every Texas nonprofit corporation must establish and maintain a corporate record. That’s why every board should appoint someone to take minutes, or a summary of every board meeting, documenting what was said and what decisions were made.
• Finalize responsibilities for each board member: If one board member will be responsible for fundraising while another raises awareness for the cause, you should assign those roles at the initial board meeting.
• Appoint officers for the nonprofit (if needed): Some corporations choose to have their officers, such as the CEO or CFO, be members of the board. Others appoint non-board members to fill these roles, creating a division between the governance and day-to-day operations. Either choice is fine, but these vital roles should be filled.

This initial meeting will be a very full, technical day (or even series of days!), but nailing down these aspects will help you establish a nonprofit that’s compliant with Texas state law and efficiently run.

Take Care of Taxes

Taxes as a nonprofit are a tricky beast; frankly, we recommend getting advice from a tax lawyer, accountant, or similar consultant to make sure you cover all your bases! But let’s take a quick look at the basics for nonprofit taxes.

First, apply for tax-exempt status on the federal level

If you don’t file for tax-exempt status, you’ll technically be liable for corporate income taxes. And that’s the last thing a non-profit wants. That’s why you’ll need to start out by filing Form 1023 or Form 1024, which are the applications for charitable, religious, or educational groups and other nonprofits respectively. After that application is completed, you’ll play the waiting game. The IRS can take up to 180 days to approve or reject your application, so we highly recommend completing the application correctly the first time.

Once your application is approved, you’ll receive a letter of tax-exempt status from the IRS. This automatically exempts you from corporate income taxes on the federal level, and it lays the groundwork for your state taxes, too. With this federal designation, you’ll be all set to apply for exemption from the state’s corporate income tax and the state sales taxes. For more information on this exemption, how to apply, and more, we recommend consulting the Comptroller of Texas.

Obtain an EIN

An EIN, or an Employer Identification Number, is an important identifier to get; it acts a bit like a Social Security Number, but for a business entity. Unfortunately, you aren’t assigned one automatically.

Thankfully, it’s free to apply for an EIN online with the IRS. Even if you don’t plan to have employees right away, it’s a good idea to have this number from the get-go. Miscellaneous forms, such as license applications or even bank accounts, may request this number.

Account for employment & miscellaneous taxes

No two businesses are alike, so each nonprofit will have slightly different taxes. That said, Texas nonprofits with employees will need to account for withholding taxes and unemployment taxes on the state and federal levels.

There are also miscellaneous industry-specific taxes in Texas, such as fees for hotels, crude oil, cigarettes, and more. In most cases, these taxes won’t apply to your nonprofit, but it’s still a good idea to double-check with the Texas Comptroller of Public Accounts just to be sure you’ve covered all your responsibilities.

That’s the basic gist of nonprofit taxes in Texas. We still recommend consulting with a tax professional, as they’ll be able to give you specialized advice for your unique situation.

Register for Licenses and Permits

Licenses and permits are especially important for nonprofits. And there are three major categories of potential permits and licenses: fundraising, lobbying, and licensing. Let’s walk through the Texas requirements for each of those three areas.

1. Fundraising

A lot of states require you to register in order to solicit charitable contributions. Texas is a bit unique; only some types of organizations need to register: veterans organizations, public safety organizations, and independent promoters. All other nonprofit types should be good to begin fundraising, but you can consult the Secretary of State for more information about registration forms, fees, and procedures.

2. Lobbying

If your nonprofit will be lobbying for its cause in a formal capacity, then you’ll need to ensure that each person lobbying for you has the appropriate registration. The registration fee is normally $750 per lobbyist, but Texas lowers the fee to $150 for lobbyists representing tax-exempt organizations.

Lobbyists are also required to submit regular reports about their expenses and activities, and they have to complete training in ethics regularly. For more information on legal requirements for lobbyists, consult the Texas Ethics Commission.

3. General licensing

Nonprofits are tax-exempt, but they aren’t exempt from licensure requirements, whether that’s for an industry-specific license or a state general business license. So you’ll need to get the licenses that apply to your unique organization.

Texas, unlike some states, doesn’t have a general business license that every entity in the state needs to get. So most license requirements come at the industry level instead. Texas upholds all federally regulated industry licenses, and the Department of Licensing & Regulation is a great place to check out the state-level license requirements. It’s up to you to learn if there are any licenses for your industry, so be sure to complete this step!

Whenever you apply for a license or permit, we recommend inquiring about the requirements for renewing your licenses. That way you’ll know exactly how often you’ll need to renew your licenses (if applicable).

Meet Insurance Requirements

We highly recommend that every business entity maintain at least some sort of general liability policy — even nonprofit entities. There’s always a chance that something can go wrong (no matter how careful you are).

A natural disaster can happen, a break-in might cost you some important equipment, or an accident during day-to-day operations might cause a broken bone and damaged property. A general liability policy will protect your business if something like that happens.

Texas state law doesn’t require private employers to get a workers’ compensation insurance policy, but it’s highly recommended. You can learn more about who is required to have one (and how to obtain it) with the Texas Department of Insurance.

Top Resources for Texas Nonprofits

Nonprofit work isn’t always easy, but you never have to go it alone! There are dozens, if not hundreds of nonprofit resources available to Texas organizations.

On the national level, there’s the National Council of Nonprofits. They exist to advocate for and strengthen nonprofits throughout the country by providing nearly comprehensive resources, teaming up with each state’s nonprofit network, and keeping you aware of the trends in policy and public opinion. It’s also a great place to peruse the latest reports and data about charitable giving and advocacy in the U.S.

On the state level, you can always turn to Mission Capital. In their own words, Mission Capital exists to “equip and connect mission-driven leaders, organizations, and networks advancing equity and opportunity through their work.” The mission does require membership (and they offer several different tiers to make membership accessible to everyone), but joining grants you a wide variety of benefits: a wide array of courses, a jobs board, salary and sector data, free monthly programming, and much more, so joining will be worth your while.