Nonprofits
We assist with the filing of two types of nonprofit organizations: 501(c)3 (this is in any state) and a nonprofit corporation with the state (this is in Texas only)
In order to qualify as a nonprofit, an organization must meet the following three criteria.
- The organization must be a private organization separate from the government
- The organization must be an established, self-governing body
- The organization must not distribute profit to anything else other than the advancement of the organization.
There are countless other legal qualifications required in order to be recognized as a nonprofit organization. However, if your organization does not meet the baseline criteria listed above, there’s no chance of it being recognized as a nonprofit.
Charities fall under the nonprofit designation known as 501(c)(3), also known as a “true nonprofit.” When people think of nonprofits, they are often thinking about 501(c)(3)’s. Not all nonprofit organizations are tax-exempt, but all 501(c)(3) nonprofit organizations are.
On the flip-side are nonprofit organizations like The Better Business Bureau, that provide a public good or service, but are not considered a charity. These nonprofit organizations are given a different distinction because while they do work toward a shared goal or mission, they do not serve the broader public good.
Your local hospital or public university serves the general public toward a mission of social good, which is why they are a charity. An organization like The Better Business Bureau focuses specifically on promoting the betterment of local businesses, which is why they are only considered a nonprofit organization.
Very simply put – all charities are nonprofits, but not all nonprofits are charities.
What are the benefits of having a 501c3?
Tax exemption under Internal Revenue Code section 501(c)(3) provides a number of benefits:
- Exemption from Federal income tax;
- Tax-deductible contributions;
- Possible exemption from state income, sales, and employment taxes;
- Reduced postal rates;
- Exemption from Federal unemployment tax; and.
- Tax-exempt financing.
Nonprofit Corporations:
Not all non-profit organizations are filed with the Secretary of State. Many, but not all, non-profit organizations choose to incorporate. A nonprofit corporation is created by filing a certificate of formation with the secretary of state in accordance with the Texas Business Organizations Code (“BOC”). “Nonprofit corporation” means a corporation no part of the income of which 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.
Is a nonprofit corporation a tax-exempt entity? If not, how do I become tax-exempt?
A Texas nonprofit organization—whether a corporation or an unincorporated association—is not automatically exempt from federal or state taxes. To become exempt, the organization must meet certain requirements and apply with both the IRS and the Texas Comptroller of Public Accounts.
To learn more about the rules and procedures for obtaining federal tax-exempt status, read IRS Publication 557, “Tax-Exempt Status for Your Organization.” Questions about federal tax-exempt status can be directed to:
IRS
Exempt Organizations Section
(877) 829-5500
Are the books and records of a nonprofit corporation available for inspection?
Section 22.351 of the Texas Business Organizations Code gives a member of a nonprofit corporation, on written demand, the right to examine and copy the corporation’s books and records. The member, or the member’s agent, accountant, or attorney, may examine and copy these records at any reasonable time and for a proper purpose. Section 22.352 also requires a nonprofit corporation to maintain financial records in accordance with generally accepted accounting principles; the board of directors is required to prepare or approve an annual financial report for the preceding year.
Additionally, section 22.353 requires certain nonprofit corporations to make all records, books, and annual reports of financial activity available to the general public for inspection and copying. However, section 22.353 does not apply to (1) corporations that solicit funds only from their members; (2) corporations that do not intend to solicit and do not actually receive contributions in excess of $10,000 during a fiscal year from sources other than their members; (3) proprietary schools; (4) religious institutions; (5) trade associations or professional associations whose principal income is from dues and member sales and services; (6) insurers; or (7) alumni associations of public or private institutions of higher education.
Under certain circumstances, a nonprofit corporation’s books and records are also available to the public under the Texas Public Information Act (chapter 552 of the Government Code). Section 552.003(1)(A) of the Public Information Act defines “governmental body” to include the “part, section, or portion of an organization, corporation, commission, committee, institution, or agency that spends or that is supported in whole or in part by public funds.” For more information on the Public Information Act, please contact the Attorney General; the secretary of state cannot provide advice regarding the application of the Public Information Act to a particular nonprofit corporation.
