Starting a non-profit in Texas—Forming the entity
Updated: May 31, 2022
Congratulations, you’ve decided to start a non-profit. You’ve diligently researched the current non-profit scene, found a legitimate need for a new non-profit, created a business plan, and collected some start-up funding. What’s next?
In short, there are two steps: 1) form a non-profit corporation, and (2) apply to the IRS for recognition of tax-exempt status. The following sets forth a basic roadmap for forming a non-profit corporation in Texas. In future posts, I’ll dive deeper into the nuances of the two above topics, but this article provides an overview of the first step.
1. State incorporation
State laws and regulations dictate how an organization incorporates. In Texas, organizations must adhere to the Texas Business Organization Code (“TBOC”) when forming a non-profit. TBOC Section 22.101 authorizes organizations to incorporate as a corporation by executing and filing a certificate of formation with the Texas Secretary of State (“SOS”).
The SOS provides Form 202 to aid in the formation of a non-profit corporation. Form 202 meets minimum state law requirements, but does not include additional statements that the IRS might require for tax-exempt status. If the Certificate of Formation does not meet the IRS’s requirements, the IRS will require amendments and may only grant exemption from the date of the amendment rather than the retroactive to the date of incorporation. For this reason, I recommend consulting with an attorney to prepare a certificate of formation that satisfies both state law and federal law.
2. Corporate bylaws
Corporate bylaws contain a non-profit’s internal governing rules. In general, bylaws define: the size of the board and how it will function; roles and duties of directors and officers; rules and procedures for holding meetings, electing directors, and appointing officers; and other essential corporate governance matters. I can’t stress enough that bylaws must fit an organization’s particular goals for governance and operations. Generic bylaws can cause issues down the road, which is why I recommend customizing the bylaws to match desired corporate governance and to comply with applicable state law.
Collectively, the certificate of formation and the bylaws form the governance structure for the corporation.
3. Governance policies
The IRS Form 990 asks whether a nonprofit has adopted certain policies, including a conflict-of-interest policy, an executive compensation policy, a document retention and destruction policy, a gift acceptance policy, and a whistleblower protection policy. It’s not enough for an organization to adopt these policies. Rather, the organization should read, understand, and follow the particular policy.
4. Organizational meeting
Once you incorporate the non-profit, the non-profit’s initial directors must meet to satisfy organizational formalities. The Board may meet in-person (or teleconference) to accomplish these tasks. Generally, however, Boards act through a unanimous written consent of all directors.
Either at the organizational meeting or via a unanimous written consent, the directors will take the following initial corporate actions: (a) approve the filed certificate of formation; (b) approve the bylaws; (c) elect officers per bylaws; (d) identify the corporation’s bank and designate certain officers as bank signatories; (e) adopt governance policies; and (f) authorize any other initial corporate business.
To open bank accounts, the corporation will need to obtain a federal Employer Identification Number (“EIN”) from the IRS by filing IRS Form SS-4. The IRS has an online portal for the SS-4, and the process only takes about 15 minutes. Once you submit the SS-4 online, the online portal immediately provides an EIN Letter. It is important not to apply for an EIN before the organization is formed under state law because the EIN cannot attach to an entity that does not yet exist under state law.
In Texas, the time required to accomplish these five steps depends on various factors (e.g., how complex the governance structure is and how quickly the Texas Secretary of State can process the Certificate of Formation). Once you form the entity, the next step is to apply to the IRS for recognition of tax-exempt status. I’ll discuss that step in a future post.