Texas Nonprofit Corporation FAQ

What is a Texas nonprofit corporation?

It's a legal entity created under Chapter 22 of the Texas Business Organizations Code and filed with the Secretary of State. "Nonprofit" describes how it handles money — no owners, no profit distribution, surplus stays with the mission — not whether it can earn revenue. It can. The corporation is a separate legal person that can hold property, sign contracts, hire staff, and be sued in its own name.

How is a nonprofit different from an LLC?

An LLC has members who own it and can take profit out. A nonprofit has no owners at all — it's governed by a board of directors who hold it in trust for its purpose. The formation document is different (a Certificate of Formation for a Nonprofit Corporation), the governing document is different (bylaws instead of an operating agreement), and on dissolution the assets have to go to another exempt organization rather than to individuals. If someone tells you to "just form an LLC" for a charity, that's the wrong structure.

What document forms the corporation?

The Certificate of Formation for a Nonprofit Corporation — Texas Form 202. It's the state's version of Articles of Incorporation. You file it with the Corporations Section through SOSDirect or by PDF.

How many directors do we need?

At least three. Texas requires a minimum of three directors on a nonprofit board. They govern the organization; they don't own it. For 501(c)(3) purposes, the IRS also prefers a board that isn't dominated by related individuals.

Does forming the corporation make us tax-exempt?

No — and this is the most important thing to understand. Forming the Texas corporation creates the legal entity. Federal tax exemption is a separate application to the IRS, filed after the corporation exists. Texas tax exemptions are yet another step, handled through the Comptroller. Three different processes, two different agencies.

How do we get 501(c)(3) status?

After forming the corporation and getting an EIN, you file Form 1023 with the IRS, or the streamlined Form 1023-EZ if your organization is small enough to qualify. The IRS reviews your purpose, finances, governance, and activities, then issues a determination letter if approved. That letter is what donors and grantmakers want to see. We cover this in depth on the bylaws page.

What's the difference between 1023 and 1023-EZ?

Form 1023 is the full application — more detailed, longer to prepare, and required for larger organizations and certain types (like churches and hospitals). Form 1023-EZ is a shorter online application for smaller organizations that fall under a gross-receipts and assets ceiling and aren't in an excluded category. Many small startups qualify for the EZ, which is faster to process. Check the eligibility worksheet before assuming you qualify.

Do we owe Texas franchise or sales tax?

Most 501(c)(3) organizations can obtain exemption from Texas franchise tax and, where applicable, sales tax — but you have to apply for it through the Texas Comptroller after you have your IRS determination. Exemption isn't automatic just because you're a nonprofit or even because you're federally exempt.

Do we need a registered agent?

Yes. Every Texas nonprofit must continuously maintain a registered agent with a physical Texas street address who has consented to serve. The agent receives service of process and official state mail. It can be a Texas-resident individual, an authorized organization, or a commercial service — but not the corporation itself.

What ongoing state filings does a Texas nonprofit have?

Texas nonprofits don't file a routine annual report the way many states require. Instead, the Secretary of State may request a periodic report from time to time — not every year. When that request arrives, you have to respond and update the state's information about your directors and registered agent, or the corporation's standing is at risk. Separately, most exempt organizations file an annual Form 990 with the IRS.

What happens if we ignore a periodic report request?

Failing to respond to a periodic report request can lead to involuntary termination of the corporation's existence by the Secretary of State. That's a serious status problem, though it can generally be cured by filing and paying the associated fees. The cleaner path is to respond when the request comes — which is easier if your registered agent is actually monitored.

Can founders be paid?

Yes. Founders can be employees and draw a salary, and many are. Compensation has to be reasonable for the work and approved through a proper process, ideally by disinterested board members under a conflict-of-interest policy. What founders can't do is take profit out as owners, because a nonprofit has no owners. Excessive or self-dealing pay is a fast way to endanger exempt status.

Can a nonprofit make money?

Absolutely. Nonprofits can and do generate revenue — through program fees, sales, events, and services. The constraint is where the money goes: back into the mission, not into anyone's pocket as profit. Note that revenue unrelated to your exempt purpose can trigger unrelated business income tax (UBIT), which is a conversation for your CPA.

Do we need to register to fundraise in Texas?

Charitable solicitation rules are a separate question from forming the corporation and from foreign qualification. Depending on your activities and any professional fundraisers you use, additional registration may apply. Because it's distinct from entity formation, confirm your fundraising obligations separately rather than assuming incorporation covers them.

Can we operate before getting 501(c)(3)?

Yes, the corporation legally exists as soon as it's formed, and you can open a bank account with your EIN, sign contracts, and begin work. But contributions aren't tax-deductible until exemption is granted (though approval is often retroactive to your filing date), and many grantmakers won't fund you without a determination letter. Most organizations begin modest operations while the 1023 is pending.