A nonprofit business is a business whose owners do not receive distributions of profits—and any money remaining after payment of the business’s expenses must be retained and used for its own expenses and for charitable purposes. Nonprofit businesses are often charitable foundations and exempt from federal income tax under Internal Revenue Code section 501(c)(3). A tax-exempt 501(c)(3) is a charitable organization that is formed for religious, charitable, educational, literary, artistic, or scientific purposes, or for preventing cruelty to animals and children, fostering amateur sports competition (locally and internationally), or testing for public safety. These charitable organizations are distinct from not-for-profit social or recreational clubs that may be exempt from federal income taxation if they meet the requirements of Internal Revenue Code section 501(c)(7).
In Texas, a nonprofit business is typically organized as a non-profit corporation under the Texas Business Organizations Code. These entities are designed to operate without the primary goal of making profits for their owners. Instead, any surplus funds after expenses are reinvested into the organization's mission or for charitable purposes. Nonprofits in Texas may apply for federal tax-exempt status under Section 501(c)(3) of the Internal Revenue Code if they are formed for religious, charitable, educational, scientific, or other qualifying purposes. This status exempts them from federal income tax and allows donors to make tax-deductible contributions. It's important to note that obtaining federal tax-exempt status requires compliance with both IRS regulations and Texas state laws, including registration with the Texas Attorney General's Office if the nonprofit is engaged in charitable activities or solicitation. Additionally, Texas offers certain state tax exemptions for qualifying nonprofit organizations, such as exemptions from sales and use taxes and franchise taxes. Nonprofits that do not qualify under Section 501(c)(3) but are organized for social or recreational purposes may seek exemption under Section 501(c)(7), which has different requirements and benefits.
