I. INTRODUCTION.

This article provides a high-level review of a lawyer's representation of a Texas nonprofit corporation as well as ethical resposnibilities of the lawyer who serves as an officer or director of a nonprofit organization. The presentation associated with this article is slotted for 30 minutes, with appropriate allocation of time to ensure participants' receipt of continuing legal education credit in ethics. This article is proportionately limited to select and key areas of consideration on these two broad and important topics.

This article does not address all legal and tax attributes or considerations that a lawyer must contemplate when representing a Texas nonprofit corporation.

II. NONPROFIT ORGANIZATIONS.

The scope of the "nonprofit" sector in the United States is vast. While the total number of nonprofit organizations may vary according to source, most sources indicate that there are somewhere between 1.6 million and 1.9 million nonprofit organizations in the United States. See Statista, Statista Research Department, Nonprofit organizations in the U.S. – Statistics & Facts (June 28, 2021) Research Department, Nonprofit organizations in the U.S. – Statistics & Facts (June 28, 2021)  https://www.statista.com/topics/1390/nonprofit-organizations-in-the-us/#dossierKeyfigures ; Cause IQ, How Many Nonprofits Are in the US?  https://www.causeiq.com/insights/how-many-nonprofits-in-the-us/ ; FinancesOnline, 46 Nonprofit Statistics You Should Know: 2022 Financial, Donor & Volunteer Data https://financesonline.com/nonprofit-statistics/  (noting that there are approximately 106,000 nonprofit organizations in Texas).

The near-two million organizations exist in many shapes and sizes and include religious organizations, churches, schools, health and human services organizations, arts societies, social organizations, trade associations, animalfocused organizations, environmental organizations, civil rights-focused groups, veterans organizations, and many others. And, these organizations are formed under various provisions of state law, and state and federal law might afford exemptions from certain state or federal taxes.

A nonprofit organization may be formed as a charitable trust, a nonprofit corporation, an unincorporated association, or a limited liability company, provided that, for the latter, the member (and all members) meet certain qualifications. See TEX. PROP. CODE §§ 111.001-.006 (Texas Trust Code); id. at § 123.001(1), (2) (defining "charitable entity" and "charitable trust" for purposes of attorney general oversight and enforcement of and within the charitable organizations industry); TEX. BUS. ORG. CODE §§ 22.001, et. seq. (core statutory regime for Texas nonprofit corporations); id. at §§ 101.001, et. seq. (core statutory regime for Texas limited liability companies); id. at §§ 252.001, et. seq. (statutory regime for unincorporated associations).

This article and presentation will focus on Texas nonprofit corporations.

III. CHAPTER 22 OF THE TBOC.

Chapter 22 ("Chapter 22") of the Texas Business Organizations Code ("TBOC") is sometimes referred to as the Texas Nonprofit Corporations Act. Chapter 22 provides the general statutory provisions for nonprofit corporations incorporated under Texas law as well as certain requirements for foreign nonprofit corporations. See id. at § 22.001(3) (defining "corporation" as a "domestic nonprofit corporation subject to this chapter.").

Multiple other chapters of the TBOC are woven into Chapter 22. For example, a nonprofit corporation may be formed for any lawful purpose not prohibited under Chapter 22 or Chapter 2. Id. at § 22.052; see id. at § 2.002 (setting forth permissible, non-exclusive purposes of a nonprofit entity). Chapter 22 also cross-references to statutes in other chapters of the TBOC, including Chapters 3, 6, 10, 11. See, e.g., id. at §§ 22.002 (cross-reference to Section 6.002, TBOC), 22.109(b) (cross-reference to Chapter 3), 22.164(a)(3) (cross-reference to Section 11.151, TBOC), and 22.251(a) (cross-reference to Chapter 10, TBOC).

The lawyer for a Texas nonprofit corporation should become familiar with Chapter 22 and its workings with other chapters of the TBOC as well as with the corporation's internal governance structure. In this regard, a Texas nonprofit corporation may be formed only by complying with the filing requirements of Chapter 3 of the TBOC, which requires the filing of a certificate of formation with the Texas Secretary of State in accordance with Chapter 4 of the TBOC. See id. at § 3.001(a), 4.001(a)(1).

And, a nonprofit corporation may have bylaws, being "the rules adopted to regulate or manage the corporation, regardless of the name used to designate the rules." See id. at § 22.001(2). In some instances, the certificate of formation or bylaws control a matter that may be covered by Chapter 22. In other instances, Chapter 22 may control, even if the certificate of formation or bylaws provide a conflicting result. Chapter 22 has various statutory provisions that will not apply, if the particular matter is otherwise addressed in the corporation's certificate of formation or bylaws. See, e.g., id. at § 22.159(a) (addressing requirements for a quorum of members and providing "Unless otherwise provided by the certificate of formation or bylaws of a corporation, . . ."), 22.103(a) (providing, "[a] provision of a certificate of formation . . . that is inconsistent with a bylaw controls over the bylaw", with one exception regarding a change in the number of directors, as provided in section 22.103(b)).

IV. NONPROFIT VERSUS TAX-EXEMPT.

"Nonprofit" and "tax exempt" are not synonymous in the world of law and tax.

"Tax exempt" generally means that the entity is, by some act of "legislative grace," exempt from one or more categories of federal or state taxes. See, e.g., Upjohn Co. v. Rylander, 38 S.W.3d 600, 606 (Tex. App.—Austin 2000, pet. denied) (noting that "Deductions and [tax] exemptions . . . are matters of 'legislative grace'").

"Nonprofit," in a literal sense, means not making or conducted primarily to make a profit. Despite the colloquial use of the word, most nonprofit organizations indeed desire to make a profit, that is, to receive and retain some amount of earnings for future use. Similarly, all nonprofit corporations are not necessarily qualified to receive the benefit of all, or even some tax exemption from a state or federal tax.

It is common for an organization to be formed as a nonprofit corporation and to not enjoy an exemption from, for example, federal income tax. In order to enjoy an exemption from a tax, a nonprofit organization must be organized and operated as required by the applicable statutes that afford an exemption from the applicable tax, and, with some exceptions, the nonprofit corporation must apply for and receive a determination of exemption from federal income tax. See 26 U.S.C. § 508(c) (excepting churches, integrated auxiliaries, and conventions or associations of churches from the requirement to file an application for exemption from federal income tax).

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Originally published by State Bar of Texas at its 13th Annual Essentials of Business Law Course

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.