A Texas non-profit corporation is different from other entities in that it does not pay dividends or issue stock nor may it enrich its directors. However, the Texas non-profit corporation is still allowed to have employees and may provide reasonable compensation to its directors. A non-profit corporation enjoys limited liability protection much like its for-profit counterparts. The directors and officers cannot use personal assets to pay for the debts or liabilities of the non-profit corporation.
In Texas, creating a legal entity is the first step in the formation process of a non-profit. The entity can be a corporation, a trust, an association or something similar. This should be done in the state that the non-profit plans on doing business. This gives the non-profit entity basically the same protections under the law that corporations enjoy such as being able to make contracts, own property and enter into business transactions.
Having members in a non-profit is optional. However, in Texas there is a minimum of three directors required to operate a non-profit entity. The entity usually vests control of the non-profit in its members who have the power to elect the Board of Directors/Governors/Trustees. There is also the option for the non-profit to have no members and be governed by its board which has the power to elect its own successors.
Advantages of a non-profit corporation
A typical Non-Profit will offer:
- Exempt status for most federal and state taxes.
- With 501(c) (3) non-profits it is possible to deduct donations.
- Some non-profits may receive grants.
- There is limited liability protection for most officers and directors.
How do you form a non-profit corporation?
Formation is actually fairly simple; however, obtaining tax-exempt status is trickier and more time consuming. To form a non-profit in Texas you must file Articles of Incorporation or a similar formation document with the Texas Secretary of State and pay appropriate filing fees. After formation you must complete form IRS form 1023 and file this with the IRS to obtain federal tax exempt status. You must also obtain tax-exempt status from the State of Texas in order to be exempt from state franchise taxes.
Things to Remember
Forming a non-profit corporation is only the first step. If you don’t follow through with the IRS and the State of Texas no donations given to you will be able to be deducted. In addition your non-profit will be liable for all federal and state taxes.