How do the governing documents (certificate
of formation and bylaws) of a Texas nonprofit corporation differ from those of
a Texas for-profit corporation?
Quite a bit, actually. Below is a non-exclusive list of ways in which
the certificate of formation and bylaws of a Texas non-profit
corporation often differ from those of a Texas for-profit corporation. Some of
these differences may be surprising to those who more frequently deal with for-profit
corporations.
1. Fewer restrictions on the name of a nonprofit
corporation. Section 5.054 of the
Texas Business Organizations Code (TBOC) requires that the name of a Texas for-profit
corporation include the word “company, corporation, incorporated, or limited”
or an abbreviation of one of those words, such as “Inc.” or “Co.” There is no
such requirement for a Texas nonprofit corporation.
2. More restrictions on the purpose of a
nonprofit corporation. Section 2.001 of the TBOC provides that a Texas
for-profit corporation is generally permitted to have any lawful purpose.
Section 2.003 of the TBOC restricts any Texas corporation (whether nonprofit or
for-profit) from engaging in certain prohibited purposes, such as unlawful
activities or operating as a bank, trust company, savings association,
insurance company, cemetery association (with certain exceptions), or abstract
or title company. Section 2.002 of the TBOC limits a nonprofit corporation to
only one or more of the following purposes:
a. Serving charitable, benevolent, religious,
eleemosynary, patriotic, civic, missionary, educational, scientific, social,
fraternal, athletic, aesthetic, agricultural, or purposes;
b. Operating or managing a professional,
commercial, or trade association or labor union;
c. Providing animal husbandry; or
d. Operating on a nonprofit cooperative basis for
the benefit of its members.
Section 2.010 of
the TBOC also restricts the permissible activities of a nonprofit corporation.
Moreover, a nonprofit corporation desiring status as an organization exempt
from federal income tax under Section 501(c)(3) of the Internal Revenue Code
(the Code) must comply with Section 501(c)(3) of the Code, which requires nonprofit corporations to be “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 (but only if no
part of its activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or animals.”
In its Instructions
to Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code), the Internal Revenue Service (IRS) suggests including the following
language as the nonprofit corporation’s purpose to ensure compliance with the
purpose requirement in Section 501(c)(3) of the Code: “The organization is organized exclusively for charitable, religious,
educational, and scientific purposes under Section 501(c)(3) of the Internal
Revenue Code, or corresponding section of any future federal tax code.”
3. May have no members or no board of
directors. Every for-profit corporation has at least one shareholder and at
least one director, but under Section 22.151(a) of the TBOC, a nonprofit
corporation need not have any members – it may be managed exclusively by the
nonprofit corporation’s board of directors. Alternatively, Section 22.202 of
the TBOC provides that a nonprofit corporation may have no board and may instead
be managed exclusively by its members. If the nonprofit corporation elects to
have no members or no board of directors, Section 3.009(1) of the TBOC requires a
statement to that effect in the nonprofit corporation’s certificate of formation.
4. Must have at least three directors. If a Texas nonprofit corporation elects to
have a board of directors, it must name at least three people to serve as directors
of the corporation under Section 22.204 of the TBOC. For-profit corporations are only required to
have at least one director under Section 21.403 of the TBOC.
5. Action by written consent of less than all directors. Sections 6.201 and 21.415(b) of the TBOC
permit the board of directors of a Texas for-profit corporation to take action
by unanimous written consent in lieu of holding a formal meeting of the board, but only
if the written consent is signed by all of the directors. On the other hand, Section
22.220 of the TBOC permits the board of a nonprofit corporation to take action by
written consent signed by the number of directors necessary to take the action
at a meeting in which all of the corporation’s directors are present (typically, a majority), if non-unanimous written consents are authorized in the nonprofit
corporation’s certificate of formation or bylaws.
6. Board committees generally must have at
least two members and only a majority of the committee need be directors. The board of a Texas for-profit corporation may
establish a board committee composed of one or more directors under Section 21.416(a)
of the TBOC. If a Texas nonprofit corporation wishes to establish a board committee,
it must comply with Section 22.218(b) of the TBOC, which requires that the
board committee consist of at least two persons. That Section permits persons
who are not otherwise directors be named to the committee so long as at least a
majority of the committee members are directors of the nonprofit corporation. A
nonprofit corporation which is a religious institution may establish committees
composed entirely of non-directors.
7. President and Secretary cannot be the same
person. A Texas for-profit corporation is required to have a President and
a Secretary under Sections 21.417 of the TBOC, but such offices may be held by the
same person under Section 3.103(c) of the TBOC. Conversely, Section 22.231(a)
of the TBOC requires that the offices of President and Secretary of a Texas
nonprofit corporation be held by different persons.
8. Directors may vote by proxy. Section 22.215 of the TBOC permits a director of
a Texas nonprofit corporation to permit someone else to vote on the director’s
behalf by granting a proxy to the other person, if proxy voting is permitted by
the nonprofit corporation’s certificate of formation or bylaws. There is no
analogous provision applicable to Texas for-profit corporations. Directors of a for-profit corporation must
vote for themselves - either in person, by written consent, or via electronic
means, such as attending a meeting via teleconference.
9. Liquidating distributions for charitable
purposes. A Texas for-profit corporation exists for the financial benefit of
its shareholders, and after all of its creditors have been paid or reserved for,
liquidating distributions from a for-profit corporation are to be made to the
corporation’s shareholders under Section 11.053(c) of the TBOC. On the other
hand, nonprofit corporations exist only for one or more of the non-profit
purposes described above. Upon liquidation of a nonprofit corporation, Section
22.304(a)(2) of the TBOC generally requires that any assets of the nonprofit
corporation remaining after all creditors have been paid must be paid to one or
more 501(c)(3) organizations. For the nonprofit corporation itself to qualify
as a 501(c)(3) organization, the nonprofit corporation must include a provision
in its certificate of formation requiring that liquidating distributions will
be made for charitable purposes.
The IRS’s Instructions
to Form 1023 suggest the following language to meet the dissolution clause
requirement in Section 501(c)(3) of the Code: “Upon the dissolution of this organization, assets shall be distributed
for one or more exempt purposes within the meaning of Section 501(c)(3) of the
Internal Revenue Code, or corresponding section of any future federal tax code,
or shall be distributed to the federal government, or to a state or local
government, for a public purpose.”
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