If you are thinking about starting a nonprofit in Texas, you’re in good company. There are nearly 93,000 nonprofit organizations (NPOs) across the Lone Star State. These nonprofits employ hundreds of thousands of workers, pay billions of dollars in annual wages and make a difference for communities across Texas and the nation.
Because nonprofits are dedicated to promoting social causes and furthering missions for the public good, the IRS grants these organizations tax-exempt status. However, starting a nonprofit in Texas can be complex and time-consuming, particularly if you try to go at it alone. To simplify the process, consider tapping into an affordable and professional online filing service, such as Swyft Filings.
Keep reading for guidance on how to start a nonprofit in Texas.
Considerations for Starting a Nonprofit in Texas
Before establishing an NPO, it’s important to weigh the pros and cons. Here are a few of the advantages and disadvantages of starting a nonprofit in Texas:
Nonprofits that qualify as public charities under the Internal Revenue Code 501(c)(3) are eligible for exemption from federal corporate income tax. Generally, when an organization is exempt from federal taxes, it will also be exempt from similar state and local taxes. To qualify for tax-exempt status, a nonprofit organization must meet certain requirements and apply with the IRS and Texas Comptroller of Public Accounts.
Public & Private Funding
Nonprofits are eligible to receive grants from public and private organizations as well as donations from individuals. Each year, Texans contribute nearly $16 billion to charities, representing more than 3.5% of household income.
Limited Personal Liability
When a nonprofit is incorporated, its directors, officers, and members receive protection from personal liability for the organization’s legal obligations. This is a valuable advantage if legal action is taken against a nonprofit.
Once a nonprofit is incorporated, the organization exists as a separate legal entity from its founders, directors, officers, and employees. This puts the organization’s mission above the personal interests of individuals associated with the nonprofit.
Time, Effort & Money
Starting a nonprofit in Texas takes heaps of time, energy and money. When you submit the paperwork to the IRS to achieve 501(c)(3) status, there is often a lengthy waiting period, not to mention a substantial filing fee.
Not only is a 501(c)(3) nonprofit organization limited in how it raises and spends funds, but it is also subject to heavy IRS oversight. To maintain tax-exempt status, nonprofits must comply with stringent financial, legal and other reporting requirements. These organizations must keep detailed records and submit annual filings to the state and IRS by specific deadlines.
Unlike for-profit businesses, nonprofits must operate under full transparency. The general public has access to a nonprofit’s state and federal filings, which includes details about expenditures as well as salaries of founders, directors, officers, and employees.
Types of Nonprofit Organizations
The state of Texas recognizes several different types of non-profits, including:
- Veterans organizations
A Texas nonprofit may be structured in one of the three following ways:
- Unincorporated Nonprofit Association
While an unincorporated nonprofit association may qualify for tax-exempt status, it does not enjoy limited personal liability. This type of organization is not required to register with the Texas Secretary of State.
- Nonprofit Corporation
Not only do incorporated nonprofit organizations benefit from limited personal liability protection, but they also are more likely to obtain federal and state tax exemptions.
- Nonprofit LLC
Although these entities do provide limited personal liability protection, it is much more difficult for a nonprofit LLC to obtain tax-exempt status. According to the IRS, an LLC can only be granted tax exemptions if all LLC members are tax-exempt organizations.
How Much Does It Cost to Form a Texas Nonprofit?
The Texas Secretary of State charges a $25 fee to file the nonprofit certificate of formation (Form 202) by fax, mail, in person or online. If you file online and pay with a credit card, the state charges an additional 2.7% convenience fee.
To obtain federal tax-exempt status, nonprofits must file IRS Form 1023. The fee for this application is $275 or $600, depending on the size and nature of the nonprofit.
How Long Does It Take to Start a Nonprofit in Texas?
If you file the Texas Certificate of Formation online, you can expect to receive a response within two business days. It can take five to seven business days when you file by mail.
To obtain federal tax-exempt status, you will need to file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. It often takes six months or longer for the IRS to review and respond to your application.
Requirements and Mandatory Forms
Your nonprofit name must be different from any names reserved or registered with the Texas Secretary of State as well as any domestic or foreign entities currently operating in the state. To see if your desired name is available, you can pay a $1 fee to search the SOSDirect, the Texas Secretary of State’s online directory.
Board of Directors
When starting a nonprofit in Texas, your organization can be managed by members or a Board of Directors. If you choose a Board of Directors, you must have at least three directors on your board.
In the state of Texas, nonprofits are required to create bylaws. These are the rules and policies your organization will follow when it comes to determining each member’s responsibilities, holding meetings, electing officers and other corporate procedures.
As soon as your nonprofit’s certificate of formation is approved by the Texas Secretary of State, you will need to apply for an employer identification number (EIN) with the IRS. This number is a necessity if you want to open a bank account, apply for tax exemptions, hire employees and handle other critical issues.
To incorporate your Texas nonprofit, you will need to complete and file the Texas Certificate of Formation – Nonprofit Corporations (Form 202) with the Texas Secretary of State. This form must include the following information:
- Entity Name & Type
- Registered Agent & Registered Office
- Supplemental Provisions/Information
- Effectiveness of Filing
In Texas, nonprofit organizations are not required to obtain a state business license. However, if your organization sells tangible goods or services, you must apply for a Texas Sales Tax Permit with the Texas Comptroller’s office.
Does a Texas Nonprofit Need a Registered Agent?
Yes, when starting a nonprofit in Texas, you are required to appoint and maintain a registered agent. A registered agent is an individual or business that is authorized to receive legal notices on behalf of the nonprofit organization. You may choose to be your own registered agent or you can select another individual, accountant, attorney or a professional registered agent service like Swyft Filings.
Tax Exemption Requirements
Once you have formed your nonprofit corporation, you can apply for federal and state tax-exemptions.
Federal tax exemption
While the IRS recognizes many different types of tax-exempt organizations in Section 501(c) of the Internal Revenue Code, the majority of nonprofits apply to qualify as a 501(c)(3) organization. To obtain this federal tax-exempt status, you will need to file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This is a lengthy, detailed form that requires a great deal of information about your nonprofit organization, including finances, organizational structure, operations, history and more.
Texas state tax exemption
Once you have obtained federal tax exemption, you can apply for state tax-exempt status with the Texas Comptroller of Public Accounts. The simplest way to accomplish this is to file Form AP-204 and include a copy of your IRS exemption letter.
Retain tax-exempt status
To retain your nonprofit’s federal tax-exempt status, you must file Form 990-N, Form 990-EZ or Form 990 with the IRS, depending on your organization’s annual gross income.
Ready to Start Your Texas Nonprofit Organization?
Still not sure how to start a nonprofit in Texas? Turn to the experts! Starting a nonprofit in Texas is incredibly easy with Swyft Filings. With our simple, fast and affordable filing process, you can form your nonprofit online in less than 10 minutes.
Even better? We’ll protect your personal assets from liabilities and prepare and file all required documents with the Texas Secretary of State. With Swyft Filings on your side, you can quickly raise capital, begin accepting donations and start making a difference! Learn more here.