By: James A. Bradley, CPA, MBT(Tax), Tax Manager at Millan and Co, PC, Austin, TX. June, 2019. email@example.com
A nonprofit organization is organized for charitable, educational, or religious purposes, and it can qualify for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. A nonprofit has many benefits. Nonprofit organizations are eligible for exemption from federal and state income taxes. Also, a nonprofit or tax-exempt organization can receive tax deductible donations from individual donors. One of the reasons for becoming a Section 501(c)(3) tax-exempt organization is that it increases your ability to attract and receive public and private grant funds and donations.
Protecting the members of the nonprofit group from personal legal liability is one of the main reasons for forming a nonprofit corporation. With a nonprofit corporation the officers, directors, and members will not usually be liable for the nonprofit corporation’s debts or liabilities including lawsuit judgments. The nonprofit corporation is a separate legal entity that has perpetual existence. The officers or directors may come and go but the nonprofit corporation has perpetual existence. The principals of the nonprofit may also be employees of the nonprofit, and they may receive a salary and employee benefits. Also, the formal corporate documents including the articles of incorporation, the bylaws, the minutes of meetings, and the board of directors’ resolutions are very useful to your nonprofit organization. These documents embody the nonprofit corporation’s operating rules and provide structure and procedures for decision making and dispute resolution.
There are certain steps that the nonprofit corporation founder or founders must take in order to form a Texas nonprofit corporation. First, your nonprofit organization forming group or forming individual should write a brief mission statement. Put in writing in general terms what your nonprofit organization intends to accomplish. Next, you should choose a name for your Texas nonprofit corporation. You should check with the Texas Secretary of State to see if the name is available. You should then select the initial directors for your nonprofit corporation. Texas requires that you have at least three directors on your nonprofit board of directors.
Next, you should prepare and file your nonprofit corporation articles of incorporation. You create your nonprofit corporation by filing a certificate of formation with the Texas Secretary of State. This certificate of formation includes the name of the nonprofit corporation, the purpose of the nonprofit corporation, the name and address of the organizer, and the names and addresses of the initial directors. Other information is required. This is the minimal information necessary to create a nonprofit corporation in Texas. In order to receive tax-exempt status from the IRS you will have to provide additional information. This additional information includes a statement of purpose that meets
the requirements of the IRS and the Internal Revenue Code. A statement that your nonprofit organization will not engage in prohibited political and legislative activity, and a dissolution of assets provision dedicating your assets to another Section 501(c)(3) organization upon dissolution is also required.
Next, you will have to prepare the bylaws for your nonprofit corporation. The bylaws contain the rules and the procedures that the nonprofit organization will have to follow for holding meetings, electing officers and directors, and taking care of other legal formalities required by the state of Texas. The bylaws are the internal operating manual for the nonprofit organization. The first board of directors meeting is usually referred to as the organizational meeting of the board. In this meeting the board of directors should approve the bylaws, appoint officers, set an accounting period and a tax year, and approve the initial transactions of the corporation such as the opening of the bank account.
This nonprofit corporation should now obtain an employer identification number (EIN) from the IRS. This can be done on the IRS website. This tax identification number is needed for the IRS Form 1023 which is used to apply for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. The Form 1023 requires a lot of information about the organization including its history, finances, organizational structure, governance policies, operations, and activities. Smaller organizations may be eligible to file IRS Form 1023-EZ. The articles of incorporation and the bylaws must be attached to the Form 1023 or Form 1023-EZ.
After the nonprofit organization receives tax-exempt status, it can apply to the Texas Comptroller of Public Accounts for exemption from Texas franchise and sales taxes. A Form AP-204, Texas Application for Exemption, along with the IRS determination letter granting tax-exempt status under Internal Revenue Code Section 501(c)(3) is filed with the Texas Comptroller. Texas does not require nonprofits to register with the state before soliciting contributions from Texas residents.
After the Texas nonprofit corporation is formed by the Texas Secretary of State’s office and the nonprofit corporation files for tax-exempt status under Section 501(c )(3) of the Internal Revenue Code and the nonprofit corporation receives tax-exempt status from the Texas Secretary of State, it has annual filing requirements with the IRS. The annual IRS filing requirements are met by filing IRS Form 990, Form 990-EZ, or Form 990-N depending upon the size of the nonprofit corporation. Nonprofit corporations with gross receipts of over $50,000 file Form 990 or Form 990-EZ. Smaller nonprofit organizations with gross receipts of less than $50,000 file the Form 990-N, e-postcard, electronically. These forms are due on the fifteenth day of the fifth month after the end of the nonprofit organization’s taxable year. For a calendar year corporation, this form is due on or before May 15. If the organization fails to file this form for three years in a row, this organization will automatically lose its tax-exempt status. This nonprofit organization will then be subject to regular corporate income taxes just like any for-profit corporation. Also, if the Form 990 is filed late, the IRS late filing penalty is $100 per day for organization’s with gross receipts over $1,000,000. The IRS late filing penalty is $20 per day for smaller nonprofit organizations. The IRS Form 990 must be available for public inspection upon demand.
Yes, it is a complex process to set it up. That’s why, if you feel you need our professional team to help you, let us know. Please contact our Tax Director Carlos Nazario firstname.lastname@example.org if you have any questions regarding the above. At Millan and Co. we are business & non-profit entities consulting CPAs who can help you in your overall tax planning and compliance.
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