Not for profit organizations (NFPO) in Texas are organizations with owners who do not earn income through the organization's operations. All profits are funneled back into the organization. Unlike nonprofits, NFPOs do not have to have a mission established for the public good but are still tax exempt. NFPOs are set up for a specific purpose to achieve member-designated goals. The laws governing NFPOs can be complicated and failure to comply can lead to serious legal troubles.
At the Law Offices of Trent Nichols, our business law attorney in Shiner and Hallettsville can help you with an NFPO from formation until its cessation and from document review to litigation, if necessary. Contact us at (361) 594-5004 in Shiner or at (361) 798-3217 in Hallettsville to schedule a consultation and ensure that your not-for-profit organization succeeds.
Key Laws and Regulations Governing Not-for-Profit Organizations
Not-for-profit organizations operate in a legal environment subject to various laws and regulations. Some key legal issues that NFPOs should be aware of involve anything from incorporation to contracts law.
- Incorporation. NFPOs are typically formed as nonprofit corporations, which are subject to state incorporation laws. Failure to properly incorporate can result in the loss of legal protections, such as limited liability.
- Tax-exempt status. NFPOs must apply for tax-exempt status with the IRS to avoid paying federal income tax. NFPOs must also maintain their tax-exempt status. Failure to obtain and maintain tax-exempt status can result in significant tax liabilities.
- Fundraising and solicitation. NFPOs must comply with state and federal laws governing fundraising and solicitation. Failure to comply can result in fines, penalties, and loss of tax-exempt status.
- Governance. NFPOs must comply with state and federal laws governing governance, including board composition, conflict of interest policies, and record-keeping requirements. Failure to comply can result in legal liability for board members and other officers.
- Employment law. NFPOs must comply with a range of employment laws, including those governing minimum wage, overtime, and discrimination. Failure to comply can result in legal liability and damages.
- Intellectual property. NFPOs must protect their intellectual property, including trademarks, copyrights, and trade secrets. Failure to protect intellectual property can result in loss of valuable assets and legal disputes.
- Contracts. NFPOs must enter into contracts with vendors, employees, and other parties. Failure to properly negotiate, execute, and enforce contracts can result in legal disputes and financial liability.
NFPOs should be aware of the various legal issues that impact their operations. They should seek appropriate legal counsel to ensure compliance.
Types of Not-for-Profits in Texas
Not-for-profits can involve any number of organizations with any number of purposes. The most common types are:
- Charitable organizations, registered as a 501(c)(4)
- Social advocacy groups, registered as a 501(c)(4)
- Civil leagues, social welfare organizations, registered as a 501(c)(4)
- Local employee associations, registered as a 501(c)(4)
- Trade and professional associations, registered as a 501(c)(4)
- Social and recreational clubs, registered as a 501(c)(7)
- Fraternal societies, registered as a 501(c)(8)
- Employee beneficiary associations, registered as a 501(c)(9)
- Domestic fraternal societies and associations, registered as a 501(c)(10)
- Teacher's retirement fund associations, registered as a 501(c)(11)
- Cemetery companies, registered as a 501(c)(13)
- State-chartered credit unions and mutual reserve funds, registered as a 501(c)(14)
- Mutual insurance companies, registered as a 501(c)(15)
- Cooperative organizations to finance crop operations, registered as a 501(c)(16)
- Supplemental unemployment benefits trusts, registered as a 501(c)(17)
- Veterans' organizations, registered as a 501(c)(19)
- State-sponsored organizations providing health coverage for high-risk individuals, registered as a 501(c)(26)
Registering under the right IRS code is the first of many rules and regulations to follow.
5 Important Compliance Issues for Not-for-Profits in Texas
Though there are many compliance issues that not-for-profits should keep in mind and avoid, there are a few that occur and harm an NFPO more than other compliance issues. Much of the reason these compliance issues become an issue in the first place is simply failing to have the right legal counsel to ensure everything is in order.
1. The Purpose Must Fit the IRS Code.
Only certain organization's can be tax-exempt, and they are those with one of the following purposes:
- Testing for public safety
- Fostering national or international amateur sports competition
- Preventing cruelty to children or animals
Not having a purpose that qualifies means the NFPO is not in compliance.
2. Not for Profits Must Comply with State Laws.
Not-for-profit organizations must comply with state laws, such as registering with the state attorney general's office, filing annual reports, and complying with state fundraising laws.
3. Not for Profits Must Have Governance and Management Practices.
Not-for-profit organizations must have effective governance and management practices in place, such as adopting bylaws, having a board of directors that meets regularly, and maintaining accurate financial records.
Not-for-profit organizations must also have appropriate financial management practices in place, such as preparing accurate and timely financial statements, maintaining proper internal controls, and complying with applicable accounting standards.
4. Not for Profits Must Comply with Fundraising and Solicitation Laws.
Not-for-profit organizations must comply with laws and regulations related to fundraising and solicitation, such as registering with state charitable solicitation authorities, providing proper disclosures to donors, and avoiding deceptive or misleading fundraising practices. This is true for each state where donations are solicited.
5. Not for Profits Must Maintain Proper Recordkeeping and Reporting.
Not-for-profit organizations must maintain accurate and complete records and comply with reporting requirements, such as filing annual information returns with the IRS and providing proper disclosures to donors.
It's important for not-for-profit organizations to stay up-to-date with these compliance issues if they want to maintain their tax-exempt status and operate in a legal and ethical manner.
Can a Not-for-Profit Organization in Texas be Subjected to a Lawsuit?
Not-for-profit organizations can be sued in certain circumstances. Not-for-profit organizations, like any other organization, are subject to legal liability and can be sued for various reasons.
Examples of potential lawsuits include:
- Breach of contract. When a not-for-profit organization enters into a contract but fails to fulfill its obligations under the agreement, it may be sued for breach of contract.
- Personal injury. When a not-for-profit organization is responsible for a person's property or bodily injury, it can be sued for damages related to the injury.
- Discrimination. Not-for-profit organizations are subject to anti-discrimination laws and can be sued if they engage in discriminatory practices based on race, gender, age, religion, or other protected categories.
- Intellectual property infringement. If a not-for-profit organization infringes on another person's or organization's intellectual property (IP) rights, it can be sued for damages.
Lawsuits involving not-for-profits can be complicated – they often have different legal requirements and regulations than for-profit businesses. But also, many NFPOs have limited financial resources, and so a lawsuit can bankrupt the organization. Compliance, therefore, is a serious matter for not-for-profits.
Contact a Business Lawyer in Texas Today
Not-for-profits must be formed appropriately and comply with the law. Failure to do so can lead to legal problems that can jeopardize the purpose and operations of the NFPO. At the Law Offices of Trent Nichols, our business lawyer in Shiner and Hallettsville handles all types of not-for-profit organizations. Contact us either by using the online form or calling us at (361) 594-5004 in Shiner or at (361) 798-3217 in Hallettsville to schedule a consultation and make sure your NFPO is formed properly, complies with the law, avoids legal issues, and overall benefits its benefits as it was intended to do.