Nonprofit Law Basics: What is an Unincorporated Nonprofit Association?

Nonprofit organizations can take several different shapes. While it is common for nonprofits to become incorporated entities because of the many benefits to that classification, Texas statutes still allow for them to exist as unincorporated nonprofit entities (known as “unincorporated nonprofit associations”).

What is a Texas Nonprofit Corporation?

Texas law defines a “nonprofit corporation” as a corporation in which no part of the income is distributable to members, directors, or officers [BOC, Section 22.001(5)]. A nonprofit corporation may be created for any lawful purpose, or purposes permitted by the BOC. Not all nonprofit corporations are entitled to exemption from state or federal taxes.

What is an Unincorporated Nonprofit Association?

Texas law defines an “unincorporated nonprofit association” as an unincorporated organization, other than one created by a trust, consisting of three or more members joined by mutual consent for a common, nonprofit purpose.

Nonprofit associations have many of the same responsibilities and rights of nonprofit corporations:

• Right to be sued and to sue

• Ability to apply for property and federal tax exemption

• Acquire, hold, encumber, or transfer real and personal property.

All unincorporated nonprofit associations, whether or not the entities are tax exempt, are subject to the provisions of the Uniform Unincorporated Nonprofit Association Act, Chapter 252 of the Texas Business Organizations Code.

• The Act addresses a limited number of major issues relating to nonprofit associations; namely, the authority of the nonprofit association to acquire, hold and transfer property in its own name; the authority to sue and be sued as a separate legal entity; and the contract and tort liability of an association’s officers and its members.

Are there benefits of becoming an unincorporated nonprofit association?

The main benefit to forming a nonprofit association is that it is a fairly simple process. Unlike nonprofit corporations, you do not have to file a certificate of formation.

What are the disadvantages for nonprofit associations?

While unincorporated nonprofit associations are quick to start, you should consider the drawbacks of remaining a nonprofit association.

• Trouble fundraising —
  Operating without tax-exempt status and as an unincorporated organization may save you time on paperwork, but it also may hinder your fundraising process. Donors may be wary to give to organizations that do not have either corporate status or tax-exempt status. Obtaining both will help your organization gain legitimacy.
• Limited legal protections —
  The Texas Business Organizations Code does provide some guidance, but there is relatively little case law regarding nonprofit associations. While Texas does recognize nonprofit associations, not all states do. So if your group plans on operating in another state, you will have to see what protections and rights your group will have under those particular state laws.