How do I start a nonprofit in Texas? A Step-by-Step Guide
One of the most common things I hear is, “I want to start a nonprofit. What do I need to do?” Here’s a quick step-by-step guide to forming a non-profit in the State of Texas.
- Make sure you really want to form one
- Articulate your Mission/Purpose
- Choose a Name
- Form a Board of Directors
- Create the formal corporate documents
- Register your organization with the state
- Have your first board meeting
- Apply for 501(c)(3) tax exemption
1. Make Sure You Really Want to Form One
Forming a nonprofit is not for the faint of heart. I recall a particular individual calling my office incessantly. He had a passion for the arts and wanted to share that passion with the community, which is usually how it starts. However, when we started to discuss the financial implications upfront, his tone and demeanor changed. I pointed out the documentation requirements as well. It was simply too much for him. He was also aware of other nonprofits doing exactly what he wanted to do.
I did not hear from that young man again.
But this isn’t to say that he’s not making a difference somewhere. He may have chosen to take his passion and help one of the more established nonprofits. That is a noble and worthwhile undertaking as well. There’s much to be said about working with nonprofits.
The point--do a self-analysis and decide whether this is the right thing for you to do at this time of your life. It may or may not be. Only you know.
2. Articulate Your Mission & Purpose
This is a step you should not skip. There is actually a genuine legal purpose behind this step. You need to sit down with a pen and paper, or a blank word document and write out why your nonprofit will exist. What problem will this organization solve? What value will this organization bring to your world? Author Simon Sinek, discussing the power of discovering and using your why in business in his book, Start With Why. Knowing why you exist helps you inspire the type of change you are hoping to see in the world.
Now here is where the law comes in. If you’re hoping to qualify for the majority of the grants out there and want donors to be able to claim tax exemptions, your organizational purpose must fit one the acceptable purposes stated by the IRS.
Once you write down the purpose, check to make sure it is one or more of the following:
- testing for public safety,
- fostering national or international amateur sports competition, and
- preventing cruelty to children or animals.
The IRS has explained that the word charitable is broad and “includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.” (IRS Website).
Be sure that your articulated purpose can fall into one of these categories.
3. Reserve a name with the state.
Armed with an articulated purpose, choose a name that embodies your purpose and is memorable. Check to make sure a domain name is available for this name. Then check to with the federal Trademark registry, Facebook, Instagram, and other social media platforms you may be using to spread the word.
The reason why I advise a full check of these various platforms and mediums is to ensure that you have the ability to grow your organization without hindrance. It’s also to ensure consistency across the board. This helps with marketing and establishing use of a trade name. Additionally, consistent use helps to establish brand ownership if an issue ever arises.
Register with Texas Direct on the Secretary of State’s website. Do a name check. It will cost $1 to do the name check and $40 to reserve the name.
4. Form a board of directors.
Texas law requires at least 3 board members. Find 3 people who are willing to help you build this organization. In nonprofit organizations, the board of directors are the driving forces behind building strong establishments.
Make sure your are selecting people you are comfortable sharing power with. However, do not choose people just like you. Choose individuals with varied backgrounds. The diversity of your board will allow you to consider decisions from different backgrounds.
5. Create the formal corporate documents.
The main documents to focus on at the initial stages of your organization are the certificate of formation and your organization's bylaws. In some states, the certificate of formation is called the articles of incorporation.
CERTIFICATE OF FORMATION
This is the document you file with the Texas Secretary of State. On this document, you will be required to state who your registered agent is, where your main office or registered agent's office will be located, who the initial members of your board are, and your organization's purpose (I told you it was important).
Some areas of confusion for people tend to be with regards to membership. The form asks whether the organization will have members. For most groups, the best answer is no. When it comes to non-profits, membership legally means something different from what it means in the non-legal world.
So if you select yes to having members in your organization, you are giving those members legal decision making power. For most organizations, even if you want to have "members" you don't want to select the membership tag because you don't mean membership the same way the law means it.
Another note to consider is that if you are interested in obtaining 501(c)(3) status, there are some magic words the IRS requires to see in your certificate of formation. Those phrases involve explaining the charitable purpose of the nonprofit, the way the nonprofit will handle dissolution (or ending), and the means by which the non-profit nature of the organization will be preserved.
This documents should be carefully crafted to reflect how you want your nonprofit to run. It is not written in stone or quite in effect until your first board meeting but its important to draft up your desired way of running the organization and then later adapt it with your board of directors.
It is in this document that you will articulate how voting is done, what the major roles are in the board, how money is kept, and other important structural issues.
At a later point, you'll want to develop some type of minute keeping template, as well as some way to keep track of decisions made during your board meetings.
6. Register your organization with the State of Texas.
It's now time to handle the fun stuff. Get onto the Texas Secretary of State website here, and formally register your organization. It cost $25, plus the 2.7% credit card transaction fee. You can enter all the required information online. It usually takes 1-3 days to get a response, but the information you've prepared in the preceding steps should have you covered.
7. Have your first board meeting.
Gather your amazing board of directors and start voting on items. Ratify your bylaws. Make decisions about the executive team. Find out whose doing what and starting making your nonprofit's mission a reality.
8. Apply for 501(c)(3) status.
This is a trick step because applying for tax exempt status is really the beginning of another complex, but necessary process. There are books and guides written about this step alone. However, as complicated as it maybe, it's another equally important step to take when you are starting your own nonprofit organization.
If you're confused about why another application is needed when you've already formed the nonprofit, read my post here, where I explain the difference between an nonprofit and obtaining 501(c)(3) tax exempt status.
The steps outlined above can help point you in the right direction, but can not replace the impact of an attorney who understands your vision and how the law applies to your specific situation. Be sure to find good legal help to get you setup well.