This series of blogs are dedicated to the steps needed to set up a nonprofit corporation, including steps on applying for tax-exemption with the IRS. Some items are Texas-specific; please contact us to get help in your own state.
Step 4: Select a Business Structure
A key step is deciding which business structure your organization will take. While the majority of organization opt to form as a “nonprofit corporation,” there are other options to consider, including:
- Nonprofit LLC
- Unincorporated nonprofit association
Since it is most common, for this article, we assume that you are creating a nonprofit corporation.
What is a Nonprofit Corporation?
Each state defines “nonprofit corporation” differently. In Texas, a “nonprofit corporation” is a corporation in which no part of the income is distributable to members, directors, or officers [Texas Business Organizations Code, 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.
A nonprofit corporation is created by filing a certificate of formation with the secretary of state in accordance with the Texas Business Organizations Code.
What is the Certificate of Formation? Is this the Article of Incorporation?
In Texas, the certificate of formation was formerly called the “article of incorporation.” Different states use different terms.
In Texas, the certificate of formation is the document filed with the Secretary of State to form the nonprofit corporation. The certificate, which becomes a public document, defines what the corporation will do and who will be initially responsible for the management of the corporation.
The following provisions need to be included in Texas Form 202: Certificate of Formation for a Nonprofit Corporation:
- Purposes Clause: The purposes clause should define the charitable purpose of the corporation.
- IRS Language. When you submit your certificate of formation (or articles of incorporation) you are applying for nonprofit corporate status with a state. This is a state process. When you later work towards the next step – getting tax-exempt status [called 501(c)(3) status], that is a federal tax process. During that later tax-exempt application process, the IRS will look at your state certificate of formation – and it must include certain language. For example, to obtain tax-exempt status from the IRS under Section 501(c)(3) of the Internal Revenue Code, the state certificate of formation also needs to include special clauses that relate to (i) the dissolution of the nonprofit, (ii) “inurement,” and (iii) a general statement that the corporation may not take action that would be inconsistent with the requirements for tax-exemption under Section 501(c)(3). It must be stated that, upon dissolution, any remaining assets will be distributed to other organizations exempt under Section 501(c)(3).
- Initial Directors: The certificate must name the directors constituting the initial board. The initial board of directors will serve in this capacity until they are replaced as outlined in the bylaws and the certificate of formation.
- Incorporator: The incorporator is the person who signs the certificate of formation.
- Registered Agent and Address: The certificate of formation must provide the name and address of the corporation’s registered agent and office. The agent is often the incorporator or another officer or director of the corporation. The registered office generally cannot be a post office box.
- Members: In forming a nonprofit corporation, you need to decide who will govern the corporation: voting members, the board of directors, or a combination of the two. If you are creating a nonprofit corporation with members, be sure to review the various statutory requirements relating to membership corporations, including provisions relating to voting rights and notices of meetings.
This series of blog posts describes ten steps to set up a nonprofit organization:
1: Make a Plan
6: Draft Bylaws