This Freeman Law blog provides insight for the Texas nonprofit corporation to understand its obligations relating to the maintenance of books and records and as to when, and under what circumstances, those books and records may be required to be made available for inspection.
In the near 15 years of representing nonprofit corporations, this writer has been involved in numerous scenarios involving records requests by the curious public, the media, officers, directors, management, and even members of nonprofit corporations, including churches, secular public charities, trade associations, and quasi-governmental entities.
Usually, the scope, timing, nature, and purpose of the request is worked out informally–and without litigation–between the organization and the individual requesting the records, but in almost all situations, the nonprofit corporation client does not generally know or appreciate the legal requirements for making certain records available for inspection or copying to the particular requesting party.
With thoughtful and creative drafting of governing documents, such as bylaws and internal policies tailored specifically for records inspection (and protection of the nonprofit corporation), a Texas nonprofit corporation can prepare itself for the inevitable public or internal request for inspection of records of the nonprofit corporation.
Note: This blog does not address records of a Texas nonprofit corporation that may be subject to inspection under the Texas Public Information Act, being another area of law addressed by this writer with respect to governmental entities, quasi-governmental entities, and private entities who do work for governmental entities. See Tex. Gov’t Code, Ch. 552.
Chapter 22 of the Texas Business Organizations Code
Texas nonprofit corporations are governed by Chapter 22 of the Texas Business Organizations Code (“Chapter 22”). Subchapter H of Chapter 22 contains statutory requirements and provisions for records. For example, if a Texas nonprofit corporation has members, a member, on written demand stating the purpose of the demand, to examine and copy at the member’s expense, at any reasonable time and for a proper purpose, “the books and records of the corporation relevant to that purpose.” See Tex. Bus. Org. Code § 22.351.
A “member,” in this context, means a person who has membership rights in the nonprofit corporation under its governing documents. See id. at § 1.001(53)(B). “Governing documents” means the certificate of formation of the nonprofit corporation, or the other documents or agreements adopted by the nonprofit corporation to govern the formation or the internal affairs of the nonprofit corporation, i.e., bylaws, constitutions, or other rules formally adopted to govern the affairs of the nonprofit corporation. See id. at § 1.001(36).
Financial Records Required to be Maintained
A Texas nonprofit corporation must maintain certain financial records, and some of those records must be made available to the requesting public.
“(a) A corporation shall maintain current and accurate financial records with complete entries as to each financial transaction of the corporation, including income and expenditures, in accordance with generally accepted accounting principles.
(b) Based on the records maintained under Subsection (a), the board of directors of the corporation shall annually prepare or approve a financial report for the corporation for the preceding year. The report must conform to accounting standards as adopted by the American Institute of Certified Public Accountants and must include:
(1) a statement of support, revenue, and expenses;
(2) a statement of changes in fund balances;
(3) a statement of functional expenses; and
(4) a balance sheet for each fund.”
Tex. Bus. Org. Code § 22.352(a)-(b). Texas nonprofit corporations with members also must make other records available for inspection, such as lists of voting members. See id. at § 22.158.
Financial Records Required to be Made Available to the Public
A Texas nonprofit corporation must make certain financial records available to the requesting public. This requirement is contained in section 22.353, which provides:
“(a) A corporation shall keep records, books, and annual reports of the corporation’s financial activity at the corporation’s registered or principal office in this state for at least three years after the close of the fiscal year.
(b) The corporation shall make the records, books, and reports available to the public for inspection and copying at the corporation’s registered or principal office during regular business hours. The corporation may charge a reasonable fee for preparing a copy of a record or report.”
Tex. Bus. Org. Code § 22.353(a)-(b).
If the corporation fails to maintain a required financial record or make the record available to the requesting public as required by section 22.353, the corporation commits a Class B misdemeanor. Id. at § 22.354(a)-(b). A Class B misdemeanor is punishable to the corporation by a fine not to exceed $10,000 or as determined appropriate by the court in lieu of such fine, and the Texas Attorney General will likely be notified of the matter. See Tex. Penal Code § 12.51(b)(2), (c) (Class B misdemeanor for corporations); id. at § 12.22 (Class B misdemeanor for individuals and providing for either a fine or confinement, or both).
Exemptions from Records Requirements
Sections 22.352, 22.353, and 22.354 of Chapter 22 do not apply to:
- a corporation that solicits funds only from members of the corporation;
- a corporation that does not intend to solicit and receive and does not actually raise or receive during a fiscal year contributions in an amount exceeding $10,000 from a source other than its own membership;
- certain private or independent educational institutions or a foundation chartered for the benefit of the institution or any component part of the institution;
- churches or an ecclesiastical or denominational organization, or established physical place for worship at which religious services are the primary activity and are regularly conducted;
- a trade association or professional society the income of which is principally derived from membership dues and assessments, sales, or services;
- an insurer licensed and regulated by the Texas Department of Insurance; or
- qualified alumni association of a public or private institution of higher education in Texas.
Tex. Bus. Org. Code § 22.355(1)-(7).
Notably, section 22.351—member’s right to inspect—is not included in the exceptions afforded by section 22.355 of Chapter 22. See In re Hoa Hao Buddhist Congregational Church Texas Chapter, No. 01-14-00059-CV, 2014 WL 7335188, at *3 (Tex. App.—Houston [1st Dist.] Dec. 23, 2014, orig. proceeding) (noting that a member of a nonprofit corporation has a right to inspect the books and records of a nonprofit corporation pursuant to section 22.351 of Chapter 22).
Texas Judicial Opinions
While a predecessor statute existed before codification into Chapter 22, there are only a handful of judicial opinions involving Chapter 22’s section 22.351 through 22.355, and below are the relevant judicial opinions on the books as of May 12, 2022. Most of the opinions do not get to the heart of a dispute involving section 22.351 through 22.355 of Chapter 22, and many times those statutes are referenced only in passing. But, one can see from the dates of these judicial opinions–and with the ever-hungry-for-information public–this could be an area of law that is ripe for exploitation. Thus, the Texas nonprofit corporation should prepare itself (and its governing documents) for records requests so that the corporation can ensure its assets are used for nonprofit purposes and not litigation over records inspection requests.
Reagan v. Brown, No. 3:18-CV-877-G-BH, 2020 WL 3052513, at *4 (N.D. Tex. Apr. 23, 2020), report and recommendation adopted, No. 3:18-CV-0877-G (BH), 2020 WL 3051447 (N.D. Tex. June 8, 2020) (dismissing, as frivolous, claims for violation of Tex. Bus. Org. Code 22.351).
Fallon v. Univ. of Texas MD Anderson Cancer Ctr., 586 S.W.3d 37, 53–54 (Tex. App.—Houston [1st Dist.] 2019, no pet.) (noting that a sole member of a nonprofit corporation has records inspection rights under section 22.351 of Chapter 22).
Wayne Dolcefino & Dolcefino Commc’ns, LLC v. Cypress Creek EMS, 540 S.W.3d 194, 196 (Tex. App.—Houston [1st Dist.] 2017, no pet.) (noting that Dolcefino filed a formal complaint with the Harris County District Attorney, and that the District Attorney’s office charged CCEMS with failing to produce a financial record pursuant to section 22.354).
Knapp Med. Ctr., Inc. v. Grass, 443 S.W.3d 182, 184 (Tex. App.—Corpus Christi 2013, no pet.) (addressing a petition for declaratory judgment that requested the trial court to declare KMC exempt from any requirement to produce the documents under section 22.355(2)).
Denton Cnty. Elec. Co-op., Inc. v. Hackett, 368 S.W.3d 765, 780 (Tex. App.—Fort Worth 2012, no pet.) (concluding that electric cooperative members were not intended to have with the same rights as “members” as set out in Chapter 22, sections 22.351).
Watson v. Homeowners Ass’n of Heritage Ranch, Inc., 346 S.W.3d 258, 259 (Tex. App.—Dallas 2011, no pet.) (concluding that the HOA, pursuant to its bylaws, was appropriate to establish reasonable rules regarding inspection of its records by members, including the notice to be given, the hours and days of the week when inspection may be made, and payment of the cost of reproducing requested copies of the documents).
Gaughan v. Nat’l Cutting Horse Ass’n, 351 S.W.3d 408, 420 (Tex. App.—Fort Worth 2011, no pet.) (finding for the Association and noting that because Gaughan received records from the Association that the public does not have the right to inspect, and because her right to inspect and copy those documents was subject to protection from further disclosure as confidential, the trial court did not err by entering the protective order or by declaring that the records produced to Gaughan were subject to confidential treatment prohibiting her from further disseminating them to others).
[Coincidentally, Watson (Dallas) and National Cutting Horse Association (Fort Worth) were decided on the same day, July 28, 2011.]
Wetmore v. Bresnen, No. 03-18-00467-CV, 2019 WL 6885031, at *7 (Tex. App.—Austin Dec. 18, 2019, no pet.) (referencing section 22.352 but without any substantive analysis; other issues and statutes in play adjudicated the matter in dispute).
Riggs & Ray, P.C. v. State Fair of Texas, No. 05-17-00973-CV, 2019 WL 4200009, at *4 (Tex. App.—Dallas Sept. 5, 2019, no pet.) (comparing and contrasting a claim under the Texas Citizens Participation Act with a claim for declaratory relief as to whether section 22.353 required the State Fair of Texas to provide the documents requested).
In re Houston Livestock Show & Rodeo, Inc., No. 01-18-00825-CV, 2019 WL 2376120, at *6 (Tex. App.—Houston [1st Dist.] June 6, 2019, orig. proceeding) (distinguishing a personal injury suit and a declaratory judgment suit that involved a dispute about the interpretation or construction of provisions of sections 22.353 and 22.354 of Chapter 22).
In re Methodist Primary Care Grp., No. 14-17-00299-CV, 2017 WL 3480292, at *4 (Tex. App.—Houston [14th Dist.] Aug. 14, 2017, orig. proceeding) (addressing a discovery dispute in litigation and noting that the parties in issue already had the publicly-available income statements for the nonprofit corporation. “Thus, much of the discovery Associates in Medicine seeks appears to duplicate information that it already has or that is available to it under section 22.353 of the Texas Business Organization Code.”).
Nonprofit and Exempt Organization Attorneys
Every nonprofit is different, that’s why we collaborate with our nonprofit clients to identify and meet their unique needs. Freeman Law represents associations & 501(c)(6) organizations, churches and other religious organizations, foundations, private foundations, 501(c)(3) organizations, and other nonprofit clients. While nonprofits encounter many of the same economic concerns and administrative challenges as any business, they also face many unique challenges. Schedule a consultation or call (214) 984-3000 to discuss your nonprofit concerns or questions.
