This Freeman Law blog provides an overview for the Texas nonprofit corporation to understand its obligations relating to the maintenance of books and records under Texas law and as to when, and under what circumstances, those books and records of the nonprofit corporation may be required to be made available for inspection.
Note: This blog does not address all situations in which a Texas nonprofit corporation’s records may be subject to inspection by the public or any person involved with the corporation, such as requests to inspect public records under the Texas Public Information Act. 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.
Under the Texas Business Organizations Code, a Texas nonprofit corporation must maintain the following financial records.
(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).
Public Inspection of Certain Records.
Under section 22.353 of the Texas Business Organizations Code, a nonprofit corporation must make available to the requesting public those records that an exempt organization must make available under Section 501(a) of the Internal Revenue Code of 1986. The records must be kept at the corporation’s registered or principal office in Texas for at least three years after the close of the fiscal year, and the records must be made available to the public for inspection and copying during regular business hours. The current version of Section 22.353 became effective September 1, 2023.
Under the Internal Revenue Code and related Treasury Regulations, an exempt organization must allow for public inspection and copying of the organization’s exemption applications (such as IRS Forms 1023, 1023EZ, and 1024), IRS determination letters, and annual returns (such as IRS Forms 990, 990EZ, and 990N). The records that must be made available include all documents and statements the IRS requires an applicant for tax-exemption to file with the applicable form, any statement or other supporting document submitted by an organization in support of its application, and any letter or other document issued by the IRS concerning the application (such as a favorable determination letter or a list of questions from the IRS about the application). The public’s right to inspect annual information returns or amendments is generally limited to those filed within three years of the request to inspect. See 26 U.S.C. 6104; 26 C.F.R. § 301.6104(d)-1(b)(3)-(b)(4)(iii).
The corporation may charge a reasonable fee for preparing a copy of a document. A fee is reasonable only if it is no more than the total of the applicable per-page copying charge prescribed by the fee schedule promulgated by the Freedom of Information Act. See 26 C.F.R. § 301.6104(d)-1(d)(3).
Penalties for Non-Compliance
If a Texas nonprofit 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. See Tex. Bus. Org. Code § 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). An IRS investigation and possibly penalties under federal law also may be triggered for failure to comply with records inspection obligations. See 26 C.F.R. § 301.6104(d)-1(g).
State Law Exemptions from Records Requirements.
Sections 22.352, 22.353, and 22.354 of Chapter 22 of the Texas Business Organizations Code do not apply to:
(1) a corporation that solicits funds only from members of the corporation;
(2) 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;
(3) certain private or independent educational institutions or a foundation chartered for the benefit of the institution or any component part of the institution;
(4) 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;
(5) a trade association or professional society the income of which is principally derived from membership dues and assessments, sales, or services;
(6) an insurer licensed and regulated by the Texas Department of Insurance; or
(7) 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—setting forth a member’s right to inspect—is not included in the exceptions. 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 of the Texas Business Organizations Code).
Insights
A key action item for the corporation is to identify the capacity of the requestor – voting member, director, officer, committee member, or general public – and, in some circumstances, the purpose stated for which the information is requested. Texas law is liberal on allowing members to inspect books and records, including financial records, but the law also recognizes and supports efforts to protect the improper disclosure of records that contain privileged, trade secret, or confidential information.
Texas courts have acknowledged the need to protect certain information from dissemination to others even when a statutory right to inspection by a corporate member or even the public is invoked. To that end, a nonprofit corporation may be allowed to require, as a condition to a person’s inspection or copying confidential, trade secret, or privileged books and records that the requesting individual sign a nondisclosure agreement and thereby limit or prohibit further disclosure.
Ideally, the nondisclosure expectation would be established in advance, but the organization may be reasonable in requiring a nondisclosure commitment, even without an existing formal policy on the matter. To get ahead of this issue, this author generally includes the following in nonprofit corporation bylaws: “To protect the interests of the Corporation, the Corporation may require, as a condition precedent to any inspection or copying of confidential, proprietary, or trade secret books and records, that the person requesting the records execute a Nondisclosure or Confidentiality Agreement relating to the nondisclosure of the books and records inspected or copied.”
With thoughtful and creative drafting of governing documents, such as bylaws and internal policies or pre-disclosure requirements for records inspection, a Texas nonprofit corporation can prepare itself for the inevitable public or internal request for inspection of records of the nonprofit corporation.
Texas Judicial Opinions
There are a handful of judicial opinions involving Chapter 22’s section 22.351 through 22.355, and most pre-date the Texas Legislature’s amendment to section 22.353 that became effective September 1, 2023. Most of the opinions do not get to the heart of a dispute involving section 22.351 through 22.355, and many times those statutes are referenced only in passing. In any event, below is a select list of Texas judicial opinions on the subject:
Houston Livestock Show & Rodeo, Inc. v. Dolcefino Commc’ns, LLC, 702 S.W.3d 675, 697 (Tex. App.—Houston [1st Dis.] 2024, no pet.) (finding that a public’s right of inspection may be limited by legitimate considerations of privilege, trade secrets, and confidentiality, and holding that, under former Section 22.353 of the Texas Business Organizations Code, the nonprofit corporation was entitled to redact from its general ledger and withhold from public disclosure the corporation’s trade secret information, such as the compensation the corporation paid to third parties). Note: Section 22.353 was amended by the Texas Legislature, effective September 1, 2023.
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). Note: Section 22.353 was amended by the Texas Legislature, effective September 1, 2023.
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).
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 in play adjudicated the matter).
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). Note: Section 22.353 was amended by the Texas Legislature, effective September 1, 2023.
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 publically-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.”).
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