We are passionate about nonprofits. We advise individuals regarding entity selection, entity formation, and applications for exemptions. Whether you have an existing nonprofit you have questions about, or whether you have a philanthropic idea you want to see come to life, we can visit with you about your options. Visit our Resources section for more information about Nonprofits.
What is a nonprofit anyway?
A nonprofit organization is generally an organization no part of the income of which is distributable to those managing or controlling the organization (i.e. members, owners, directors, trustees, as applicable). Instead, the income is retained by the organization to accomplish the purposes of the organization.
How is a nonprofit formed?
First, the type of entity is selected. A nonprofit organization can take the form of an unincorporated association, a trust, or a corporation. Second, the appropriate documents are drafted to officially form the entity selected. A trust consists of a document which outlines the provisions that govern the nonprofit organization. Most state statutes provide for nonprofit corporations, such as the Texas nonprofit corporation. A Certificate of Formation is filed with the Secretary of State to form a Texas nonprofit corporation. Other documents are needed to define how the nonprofit corporation is run, who is in charge, and their roles and responsibilities, though they are not filed with the Secretary of State (such as Bylaws and Minutes).
Does being a nonprofit mean the organization is exempt from federal and state taxes?
No. To become exempt, the organization must meet certain requirements and formally apply with both the IRS and the state in which it is seeking an exemption. The IRS and the state of Texas require certain provisions to be included in the governing documents of the organization. They also each require formal applications requesting tax exempt status. Exemption from federal income taxes is determined by the IRS. A good place to read more about the rules and procedures for obtaining federal tax-exempt status is the IRS Publication 557, “Tax-Exempt Status for Your Organization.”. Exemption from Texas state taxes is determined by the Texas Comptroller of Public Accounts. A good place to read more about the rules and procedures for obtaining state tax-exempt status, is the FAQs published by the Texas Comptroller of Public Accounts.
What's the difference between a charity, a private foundation, a nonprofit, and a 501(c)(3)?
- Think of nonprofits as the generic name for any organization that retains income for the organization's purposes.
- A charity is a nonprofit that derives a substantial portion of its support from the public or functions to “support” one or more organizations that are charities and has qualified under Section 501(c)(3) of the Internal Revenue Service Code as tax-exempt.
- Private foundations are usually nonprofits that were established and/or sustained with funds from a single source (like family money) or specific sources (like corporate money), rather than being established and/or sustained with funds from the general public and have qualified under Section 501(c)(3) of the Internal Revenue Service Code as tax-exempt.
- 501(c)(3) is a section of the Internal Revenue Service Code that defines a type of non-profit. "501" refers to tax exemption for certain nonprofits. "(c)(3)" refers specifically to nonprofits that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. Being granted 501(c)(3) status allows the nonprofit to avoid paying federal income taxes on most types of revenue, and also allows donors to make tax deductible contributions to the nonprofit.
How do you apply for a 501(c)(3) exemption?
Must an attorney file Form 1023?
No. However, working with a professional with experience filing exemption applications can streamline the application process.