Q: We formed an LLC and were wondering if it is possible to create a 501(c)(3) instead?
Thank you to a client from Texas for that great question! A 501(c)(3) is a tax-exempt nonprofit corporation. In Texas, you are able to convert your limited liability company to a nonprofit by filing a Certificate of Conversion of a Limited Liability Company Converting to a Corporation and paying the $325 filing fee. Here’s how to do it.
1. Hold a vote.
Refer to your Texas LLC operating agreement to review your LLC’s policy for voting to convert your business. In most cases, you’ll need to reach a quorum or a certain percentage of member approval if you own a multi-member LLC.
Voting to convert your business usually involves:
- holding a meeting of all members
- drafting a member resolution to change the LLC into a nonprofit corporation
- voting on the resolution
- passing the resolution only if the vote is unanimously in favor
- saving the resolution with your business records
Your operating agreement may, however, outline other steps to holding a vote, so be sure to check what it instructs.
Check out our LLC Member Resolution template.
2. Choose a name for your Texas nonprofit.
The name of your new Texas nonprofit should describe the services or purpose of your nonprofit. If your previous LLC name is going to be your nonprofit name, you’ll need to remove the entity identifier (“LLC,” “L.L.C.,” “Limited Liability Company,” etc.). To check the availability of a new name for your nonprofit, call the Texas Secretary of State at (512) 463-5555 (extension 711), or e-mail your potential name to [email protected].
Learn more about Texas Nonprofits.
Texas nonprofit corporation naming requirements.
Just like with naming your Texas LLC, your nonprofit name must follow specific naming requirements outlined in Texas BOC §§5.054-5.059 and the Texas Administrative Code on Entity Names like:
- name must be distinguishable from other business entities
- a nonprofit can omit an identifier
- not have an identifier for another entity type, such as “LLC”
- use only approved symbols and words
- not falsely identify its purposes or affiliations with government agencies
- not use offensive words or suggestions
3. File Texas Certificate of Conversion of a LLC to a corporation.
The Texas Secretary of State requires all converting LLCs to file a Certificate of Conversion of a Limited Liability Company Converting to a Corporation. For LLCs converting into a nonprofit, you’ll pay $325 total for filing the certificate of conversion and certificate of formation. Your Certificate of Conversion needs to include:
- the original LLC entity information and the new nonprofit information
- a plan of conversion or the alternative statements section of the form filled out
- a certificate of account status from the Texas Comptroller of Public Accounts
- a Certificate of Formation – Nonprofit Corporation
- approval from your members to your plan of conversion
What is a Texas plan of conversion for an LLC?
A Texas plan of conversion, according to the Texas BUS ORG § 10.103 Subchapter C, is a required written document that must be signed by your LLC members, which must include:
- name of the LLC and nonprofit
- statement that the new company will continue its existence
- statement of the type of entity the new company will be and jurisdiction of formation
What is a Certificate of Formation?
A Texas Certificate of Formation is a required document businesses must file with the state in order to register and form their business. Your Texas Certificate of Formation – Nonprofit Corporation outlines the key information about your new nonprofit, such as:
- the organizer of the nonprofit
- the initial mailing address
- the initial members
- the registered agent and registered office
How do I get a Texas certificate of account status?
To get a Texas certificate of account status from the Texas Comptroller of Public Accounts you’ll need to go through the Texas Comptroller’s Account Services portal online. If you’re in good standing on your taxes, you’ll be able to request your certificate right through the portal. However, the Texas Comptroller requires some businesses to submit a printed request, so review their requirements.
4. Hold an organizational meeting.
After filing your paperwork with the state, the board of directors of your nonprofit must have an organizational meeting to draft bylaws, elect officers, and discuss any other important information regarding the operation of your nonprofit.
What do I include in my Texas nonprofit bylaws?
Your Texas nonprofit bylaws are the internal documents outlining how your nonprofit is organized and operated. In Texas, bylaws are required, according to TX Bus Orgs § 22.102 (2021). Some things you can include inside your Texas nonprofit bylaws are rules for:
- adding or removing board members
- holding board meetings
- reaching a voting quorum
- handling conflicts of interest
- amending your bylaws
- dissolving your nonprofit
Check out our guide to Texas nonprofit bylaws.
5. Apply for a new EIN.
All new businesses must get a new EIN, even ones that convert from one business to another. You can apply for a new EIN from the IRS for free online, by mail, or by fax.
Learn How to Obtain an EIN Number.
6. Apply for 501(c)(3) status.
Since your main reason for converting your LLC to a nonprofit is for the 501(c)(3) tax-exempt status, once you’ve formed your nonprofit, you’ll need to file IRS Form 1023. Applying for tax-exempt status means the IRS is going to want to closely review your nonprofit’s internal documents and records.
Read our detailed 501(c)(3) Guide.