How to Start Non-Profit Organization in Texas

They say everything’s big in Texas, and that includes the hearts of many of its people. You may want to start some sort of charitable organization, to help those in need. Or perhaps you and your friends wish to found an advocacy group. You may even want to start a social club, celebrating your passions and interests.

If you wish that your group can also solicit funds such as receive donations and start other fund-raising activities, then you should formally form your nonprofit organization. That way, you’re able to do business like any other corporation, except that the money you raise all goes into serving your particular cause. You can enjoy fund-raising benefits, and perhaps even some tax exemptions.

But how do you start this process of forming a nonprofit organization in Texas? It will really help if you get the assistance of professionals, such as an online incorporation service. These services can help with complying with the various rules, and they don’t cost a lot.

Here’s an overview of the entire process, with 10 basic steps:

  • Come Up with Your Business Name

It’s like starting your own business—you need a brand name to identify your organization. Your best bet is to be very descriptive about your NPO name so people (and potential donors) know what you’re all about.

You should make sure that no other organization (including other corporations) is using the name you plan on using. You can use the SOSDirect service in the Texas Secretary of State website to check the availability of the name. It’s best if you don’t use anything too similar with other brand names in use, so you’re more easily able to forge an identity for your group.

Obviously, there are rules to follow when it comes to naming your NPO, and they’re the same rules that apply to business names. Don’t use any names that imply any formal government association, and don’t use words like “bank” or “university”. Keep the name polite.

  • Pick Your Directors and Incorporators

Your directors are the people that makeup group that makes the decisions for the NPO. You’ll need at least 3 directors, with at least 2 officers (the president and a secretary). You can set up more offices and have a person hold more than one office. But there must be a president and a separate secretary (you can’t have a person to be both the president and the secretary).

You also need a management committee with at least 2 people. To meet IRS requirements, none of the directors should be related to one another. You can set your own requirements for who can be a director, and for how long.

The incorporator is the one who signs the articles of incorporation for your NPO. You can have just one incorporator, but you can have more if you want.

  • Appoint a Registered Agent

This is also a requirement for corporations. A registered agent’s job is to receive any legal notice meant for your NPO (such as if your group is getting sued). The registered agent must have a physical location in Texas and must be present to personally receive any such notice during regular business hours.

This is one of the main services offered by many of the best online incorporation services, and it really helps. That way, you won’t have to use your home as your receiving station, and you’re able to maintain your privacy. You won’t have to be there during business hours, either.

  • Prepare and File Your Articles of Incorporation with the Secretary of State

You can find the information on the Articles of Incorporation for your NPO here. Basically, your articles of incorporation formally document the existence of your group. The paperwork details when and where your NPO was formed, and for what purpose. You will need to make sure you enter all the info that the IRS will require once you file for 501(c)(3) exemption.

You can mail or fax the articles of incorporation, or you can file them in person. You’ll need to submit the original, plus one copy, and pay the $25 agency fee. After about 3 to 5 business days, you should receive evidence of your filing, with a file-stamped copy of your articles of incorporation.

  • Get Your EIN

This is your employer identification number. It’s a unique number with 9 digits, issued by the IRS to mark your NPO. You have to apply for the EIN even if your group doesn’t have any employees at all. You’ll need that EIN for various crucial steps, like opening a bank account for your NPO, applying for apply for 501(c)(3) status, and submitting 990 returns to the IRS.

You can get the application form for EIN online, and you won’t have to pay anything to get it. You’ll get your EIN right away, unlike with snail mail when you may have to wait 4 to 5 weeks. You should print your EIN once you get it, as the IRS website may not always be available at all hours.

  • Maintain Your Records

As you run your NPO, you’ll end up with lots of paperwork. You better make sure you organize your documents properly, so you can get them when you need them. Your records will include your articles of incorporation, your bylaws and group rules, your EIN letter, minutes of directors’ meetings, and a letter regarding your 501(c)(3) determination.

You can always find software to help you maintain your records properly. Some apps even distribute records to various directors and notify people of meetings.

  • Set Up Your Bylaws

Your bylaws are basically the rules you’ve set up for your NPO, detailing how your NPO should operate. Your bylaws should match nicely with your articles of incorporation, and also meet legal requirements. During the first meeting of your board of directors, the directors will review each bylaw and ratify the document. Essentially, you have the operating manual for your NPO.

You should have contingency plans in place and include a policy regarding conflict of interest. This policy matters, if one of your directors may have personal or business interests that go against your NPO. That director may then act in their own interest, which isn’t necessarily in the interest of your NPO.

The IRS will look over your bylaws and conflict of interest policy, and these must be approved and adopted when you file your 501(c)(3) exemption. These records must be included in your NPO records kit.

  • Hold the First Meeting of the Board of Directors

During this meeting, you will elect your directors and appoint your officers. The directors can then approve various steps, like opening the bank account of the NPO. The directors will also need to review and approve the bylaws, including the conflict of interest policy. All the decisions made by the board must be recorded in the minutes of the meeting and held in your NPO records.

  • Obtain Your Texas ID Numbers and Accounts

You’ll need to download the Texas tax forms you’ll need, and then submit the forms to the Texas Comptroller of Public Accounts. You’ll have to do some research on what accounts, permits, and licenses required by your NPO.

  • Apply for 501(c) Tax Exemption

This can be very complicated, and you’re well-advised to get the help of a pro. The IRS estimates that you’ll need about 100 hours to prepare your application properly. You can either use Form 1023 ($600) or Form 1023-EX ($275). You’ll get a response in about a month (for the 1023-EZ) or in 3 to 6 months (with Form 1023).

  • Apply for Texas State Tax Exemption

You can do this once you get your IRS determination letter, following your 501(c) Tax Exemption application. Fill up the right form, and submit it to the Texas Comptroller. You can also get the Sales Tax Exemption form if you’re running a charitable organization.

There’s also a tax property exemption form you can submit as well. All these forms can be rather daunting, so you really should have a tax pro help you out.

  • Register for Fundraising

The Texas Secretary of State – Registrations Unit is in charge of this, and you should call them at 512-475-0775. There are licenses that you may need to get, depending on the fundraising activities you initiate.

FAQs

Where can I find more information about NPOs in Texas?

You should check out the NPO page on the Texas Secretary of State website.

How do I find out more about tax exemptions for my NPO?

For federal tax exemptions, you can check out the IRS rules. For Texas tax exemptions, check out the FAQs released by the Texas Comptroller of Public Accounts.

What are NPO “members”?

Your members are like the shareholders in a regular corporation. Some of your members may be part of your board of directors, but others may not be. The Texas Business Organizations Code defines a member as “a person who has membership rights in the nonprofit corporation under its governing documents.”

Members have the right to examine the records of their NPO, at any reasonable time and for a reasonable purpose. The request must be made formally, and a written demand must be made.

Can my NPO pay salaries to directors, officers, and employees?

Yes, but the salaries have to be reasonable. While the Texas Secretary of State doesn’t really define what a “reasonable” salary is for an NPO officer, the IRS once issued a paper with guidelines regarding reasonable compensation. That paper should help you out.

It’s always best to keep the salaries low, if only for marketing purposes. High salaries can give the impression that you’re only using the NPO to make money for your directors and officers. That’s not the reputation you’d want to have for a supposed “nonprofit organization”.

Can my NPO give political contributions?

Yes, but there are restrictions. You should look over the Texas Election Code, and Title 15 in particular. You’ll also want to look over guidelines issued by the IRS, the Federal Election Commission, and the Texas Ethics Commission.

You really should consult an attorney with experience in these matters, to be on the safe side.

Which authorities can investigate my NPO?

The authority falls on the Texas Attorney General, and not the Texas Secretary of State. This usually happens when your NPO does something that conflicts with its “nonprofit” status. You really want to be open on these matters, and follow the rules.

The IRS can revoke also your NPO’s tax exemption if your NPO violates any of the federal tax laws.

But the Secretary of State can demand periodic reports, which you’d have to file at the Secretary of State’s request. You have to do this once every 4 years, or else you risk the revocation of your NPO. You need to file the report within 30 days from the date that the request was sent but the secretary of state.

If you fail, your NPO may no longer be able to transact business in Texas. Your NPO may be involuntarily terminated, and it can be really bothersome to reinstate your NPO. It’s a bit like incorporating once again.

What are periodic reports?

The report contains information regarding your registered agent and registered office (name and location), and the names and current addresses of your NPO’s directors and officers.

If you have any changes regarding these things, you should file a report with the Texas Secretary of State.

Do we have to publicize our books and records?

In general, yes, according to Section 22.351 of the Texas Business Organizations Code. But there are exemptions, such as if:

  • You solicit funds only from members

  • You receive donations of less than $10,000 from sources other than members

  • Your NPO is actually a religious organization or a proprietary school, or an alumni association

  • Your NPO is a professional or trade association with income mainly from member dues and sales

The Texas Public Information Act may also require your NPO’s books and records to be made public. You really want to comply with all these requirements, especially if you wish to receive donations from the general public.

What you don’t want is to give the impression that you have something to hide. You don’t want people even thinking that you’re pocketing money from the NPO.

Conclusion

It will really help you if you obtain the help of an online incorporation service, as these services can provide all your needs. They can guide you on the various steps you’ll need to take and help with all the forms. They can also help you maintain compliance with the pertinent government agencies and meet all current Texas and IRS requirements.

Who knew that starting a nonprofit organization can be so complicated? But if you’re truly passionate about your goals of helping other people, then you should eventually complete the process in the end. The help of professionals can guide you along the way, but it is your determination to help that will encourage you to stay on your path!