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.