Structurally, a nonprofit corporation resembles other corporations with a board of directors whose members are exempt from personal liability. While a corporation is formed primarily to profit shareholders, a nonprofit corporation is formed to provide a public service. Contrary to widespread belief, a nonprofit organization may in fact earn a profit; however, in a for-profit corporation, shareholders receive some or all the profits, while profits from a nonprofit organization are reinvested into the organization. Another important difference of a nonprofit corporation, and one of its main advantages, is its potential for exemption from federal and state taxes.
Forming a Texas Nonprofit Corporation
Like a corporation, the nonprofit must follow the Texas Business Organizations Code and file a certificate of formation with the secretary of state. Among other relevant information, the certificate identifies the nonprofit’s purpose, its management, and organizational structure, its duration, as well as the names and contact information of its registering agents, directors, and incorporators.
As stated in Titles 1 and 2 of the Texas Business Organizations Code (BOC), Title 1, chapter 3, subchapter A, “In a nonprofit corporation, no part of the income of the corporation may be distributed to a member, director or officer of the corporation.” The certificate of formation also indicates whether the nonprofit corporation will be managed by a board of directors or by its members. Another important requirement of a nonprofit corporation is that a nonprofit corporation must have no fewer than three directors, one president, and one secretary, all of whom must be natural persons, as opposed to corporations. The president may not also serve as secretary and vice versa.
The IRS allows 501(c) (3) tax exempt status as long as the nonprofit corporation serves one of the following exempt purposes: “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.” If a nonprofit corporation serves one of these purposes, it may qualify for tax exemption under Section 501(c) of the IRS Code.
Working with a business lawyer familiar with the intricacies of forming a nonprofit corporation is a wise move when incorporating a nonprofit organization.
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