Nonprofit organizations can take several different shapes. While it is common for nonprofits to become incorporated entities because of the many benefits to that classification, Texas statutes still allow for them to exist as unincorporated nonprofit entities (known as “unincorporated nonprofit associations”).
What is a Texas Nonprofit Corporation?
Texas law defines a “nonprofit corporation” as a corporation in which no part of the income is distributable to members, directors, or officers [BOC, Section 22.001(5)]. A nonprofit corporation may be created for any lawful purpose, or purposes permitted by the BOC. Not all nonprofit corporations are entitled to exemption from state or federal taxes.
Learn more about forming a nonprofit corporation here.
What is an Unincorporated Nonprofit Association?
Texas law defines an “unincorporated nonprofit association” as an unincorporated organization, other than one created by a trust, consisting of three or more members joined by mutual consent for a common, nonprofit purpose.
Nonprofit associations have many of the same responsibilities and rights of nonprofit corporations:
- Right to be sued and to sue
- Ability to apply for property and federal tax exemption
- Acquire, hold, encumber, or transfer real and personal property.
Are there benefits of becoming an unincorporated nonprofit association?
The main benefit to forming a nonprofit association is that it is a fairly simple process. Unlike nonprofit corporations, you do not have to file a certificate of formation. You may file a form with the Secretary of State to appoint an individual as your group’s agent for service of process.
What are the disadvantages of becoming a nonprofit association?
While unincorporated nonprofit associations are quick to start and afford you some of the rights of an incorporated nonprofit, you should consider the drawbacks of remaining a nonprofit association.
One drawback is that in order to apply for exemption from state and federal taxes, your organization will need to provide items like governing documents, budgets, activities, etc. Operating without tax-exempt status and as an unincorporated organization may save you time on paperwork, but it also may hinder your fundraising process. Donors may be wary to give to organizations that have not been incorporated or do not have tax-exempt status. Obtaining both will help your organization gain legitimacy.
Another disadvantage nonprofit associations have to contend with is legal protections. The Texas Business Organizations Code does provide some guidance, but there is relatively little case law regarding nonprofit associations. While Texas does recognize nonprofit associations, not all states do. So if your group plans on operating in another state, you will have to see what protections and rights your group will have under those particular state laws.
Texas Secretary of State: Nonprofit Organizations
Cullinane Law Group: How to Start a Nonprofit – Step 1: Make a Plan
Cullinane Law Group: Starting a Texas Nonprofit Corporation
Cullinane Law Group: Common Mistakes of a 501(c)3 Nonprofit Start-Up
Cullinane Law Group: Nonprofit Law Basics: Nonprofit Corporation vs. Tax-Exempt Organization
Texas Secretary of State: Nonprofit Organizations FAQs