How To Start a Nonprofit in Illinois
Starting and operating an Illinois nonprofit organization can be rewarding but challenging. Just like opening a for-profit startup, establishing a nonprofit requires extensive business planning and legal consideration.
While there are many similarities across states in opening a nonprofit, there isn't a true one-size-fits-all approach. Starting a nonprofit in Illinois requires some state-specific forms, processes, and legal requirements.
While many consider all nonprofits tax-exempt organizations, not all nonprofits are exempt. The federal government and the state of Illinois only grant tax-exempt status to eligible nonprofit organizations that qualify.
The following steps outline how to start a tax-exempt Illinois nonprofit that complies with state and federal rules.
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Pick a Unique Business Name for Your Nonprofit
Your first step should be choosing a name that best represents your organization. The name must be unique—Illinois will not let you register your nonprofit using a name already in use. Business owners can use this tool on the Illinois Secretary of State website to see if their selected name is available.
Illinois also restricts the words you can include in the name of your nonprofit corporation. No corporate name can include the name of any established political party like Democrats or Republicans. You would need consent from the party's state central committee.
The name also must end with the letters NFP (not for profit) if it contains any words that give the impression the organization was incorporated for any purpose other than a nonprofit.
If you have selected an unclaimed name but aren't ready to file the articles of incorporation, you may reserve the name for 90 days. You can reserve your name by filing a Form NFP-104.10, Application for Reservation of Name. Or, you can file a written request with the name and a short description of your nonprofit's purpose with the Secretary of State Department of Business Services.
Consider Incorporating Your Nonprofit
Incorporating your nonprofit adds a few extra steps and some expense to its formation. Incorporation refers to creating a legal business entity like a corporation or limited liability corporation (LLC). It's a separate entity from its incorporators. Incorporation protects you and those working with your nonprofit from liability for its debts and obligations.
The Internal Revenue Service (IRS) will grant a tax exemption to corporations, trusts, and unincorporated associations. But unincorporated nonprofits may have unlimited personal liability if a party sues for damages.
Incorporating your nonprofit has other advantages besides protecting your personal assets as the founder. It can also help attract grants from private donors and access subsidized funding only available to incorporated nonprofits.
Appoint a Registered Agent and Office
Illinois requires every corporation to appoint a registered agent and a registered office. Your registered agent is responsible for receiving legal notices, tax documents, and other government notices on behalf of your nonprofit.
Your registered office is the address for your nonprofit on public record with the Illinois Secretary of State.
The registered agent must be either an Illinois resident or a corporation with an office in the state. The office address must include a street or a road address—it can't be a P.O. box number.
Any communication to the corporation from the Secretary of State will also be sent to this address. For this reason, it's important that your resident agent is available during business hours to sign for legal documents.
Prepare and File Your Articles of Incorporation
Articles of incorporation are the documents that create an Illinois corporation. You must file articles of incorporation with the Secretary of State.
The Secretary of State provides a fillable form you can use to form a nonprofit corporation. But you can't file articles online. The form doesn't include some specific language the IRS needs to consider your nonprofit's tax-exempt status. So, you must add that information.
You must state the name and purpose of your nonprofit. Illinois requires this statement to list a specific purpose. It will not accept any statement that is too broad or vague. The Secretary of State also won't accept language implying the nonprofit may have a for-profit purpose.
The Illinois General Not-For-Profit Corporation Act lists 35 acceptable purposes for nonprofit formation.
Suppose you're planning on seeking tax-exempt status from the IRS. In that case, you should limit your organization's purposes to one of the following (which are also acceptable for Illinois nonprofits):
- Prevention of cruelty to children or animals
- Fostering sports competition
- Testing for public safety
The IRS also requires a statement of purpose declaring the organization will not:
- Engage in activities unrelated to its exempt purpose
- Pursue prohibited political or legislative activity
The Internal Revenue Service (IRS) also has some requirements for a dissolution clause. A dissolution clause outlines how an organization terminating its operations will distribute assets and settle liabilities. A nonprofit's dissolution clause must specify the nonprofit will donate any assets to another 501(c)(3) or turn over the assets to the government upon dissolution. Members can't keep any nonprofit's assets.
Name Directors and Hold an Organizational Meeting
Illinois nonprofit corporations must have at least three directors. They don't need to be state residents or corporation members. The articles of incorporation or bylaws may include restrictions or qualifications for serving as a director.
The initial organizational meeting of your nonprofit corporation's board of directors is a significant event. This is because board members should vote on two things necessary to corporate governance and nonprofit status:
- Adoption of corporate bylaws that set forth the rules regarding operations
- Adoption of a conflict-of-interest policy
The IRS usually requires nonprofits to have both to determine tax-exempt eligibility.
Secure Necessary Licenses and Permits
While the state of Illinois doesn't require nonprofits to obtain a business license, you may need local business licenses and permits. This depends on the type of work your nonprofit does and its location.
Illinois does require a license if you plan to fundraise through games of chance, like pull tabs. You can find a list of permitted games and the application form on the Illinois Department of Revenue website. The charitable gambling license fee is $400 and is valid for two years. This license permits four charitable gambling events per year.
Part 435 of the Illinois Charitable Games Act outlines the specific laws and statutes for charitable gambling.
You may also need a zoning permit if you have a brick-and-mortar location. Local municipalities handle zoning and land use regulations. Check with the appropriate city or county to see what your building needs.
Apply for an Employer Identification Number (EIN)
You must get an Employer Identification Number (EIN) before applying for an IRS exemption, even if you don't plan on hiring employees. The IRS uses this federal tax identification number for tracking purposes. It tracks nonprofits applying for federal tax exemptions, too.
Corporations also need an EIN to open a bank account.
Applying for an EIN is free. You can apply online or by filing an IRS Form Form SS-4 application by mail or fax. If you apply online, be sure to use the official IRS website. Some commercial websites charge a fee for an EIN.
Apply for an IRS Tax Exemption
While you may have registered your nonprofit corporation with the state of Illinois, you will not be a tax-exempt organization until granted an exemption from the IRS.
Designation as an exempt nonprofit organization under Section 501(c)(3) of the Internal Revenue Code awards two significant benefits:
- An exemption from paying the federal income tax
- Donors can deduct contributions to your nonprofit from their income on their federal income tax returns
Your organization must file a Form 1023 or a streamlined Form 1023-EZ with the IRS to apply for exempt status. To use Form 1023-EZ, your nonprofit must meet the following conditions:
- Not had gross receipts of more than $50,000 in the three prior years
- Not expect to have gross receipts of more than $50,000 in the next three years
- Have assets valued at less than $250,000
- Meet other specific qualifications
The filing fee for Form 1023-EZ is $257, and $600 for the standard Form 1023.
The IRS will issue a determination letter if your nonprofit qualifies as an exempt organization. The IRS will also add the name of your nonprofit to its searchable list of exempt organizations. Potential donors can use this database to verify if a charitable organization has tax-exempt status.
Although exempt from paying federal income taxes, exempt organizations must file a Form 990 informational return. Organizations that fail to file Form 990s for three consecutive tax years will automatically lose their tax-exempt status.
Automatic Illinois Income Tax Exemption
Corporations receiving federal tax exemptions are automatically exempt from Illinois income tax. The organization also isn't required to file any informational returns with the state. But if your nonprofit corporation doesn't receive a federal exemption, it must file state income tax returns yearly.
Some Illinois nonprofit corporations may also receive an exemption from paying sales tax on goods purchased for the use of organizations formed exclusively for charitable, educational, or religious purposes or to benefit senior citizens.
To receive sales tax exemption, your organization must send a request to the Illinois Department of Revenue, Sales Tax Division. Your request should include copies of the following:
- IRS determination letter
- Articles of incorporation
- Any other document that may help determine your organization's status
It's a good idea to keep these documents in a folder for easy access, as many grants and financial institutions will require them.
Register With the Illinois Attorney General
Illinois law requires all charitable organizations or fundraisers to register with the Attorney General's office using a Form CO-1. Charitable organizations will also need to file an annual Form AG 990-IL that includes the following information:
- How much the organization has collected in donations
- How the organization spent the gifts it received, including spending on professional fundraisers
- How much the organization paid its three highest-paid employees
- The value of the organization's assets and liability at the end of the fiscal year
Both the initial registration and the annual reports are available to the public.
Resources for Illinois Nonprofit Business Owners
There are some helpful resources for Illinois entrepreneurs pursuing nonprofit ownership.
Business owners can visit one of Illinois' many Small Business Development Center (SBDC) offices. On-site business professionals provide help with business, financing information, and other resources.
The U.S. Small Business Administration (SBA) has offices in Chicago and Springfield. Learn how to register your business, find funding opportunities, and access other resources.
Need More Illinois Nonprofit Help?
Starting a nonprofit comes with much of the same business planning and legal considerations as a for-profit business. While you may be able to do it all on your own, some business owners benefit from the help of an attorney.
An experienced Illinois business organization attorney can guide you through some of the most complex aspects of your nonprofit formation. Creating your business plan and writing your articles of incorporation and bylaws is not easy. A lawyer can also help apply for tax exemptions.
Another option is to use FindLaw's DIY business formation tool. This tool simplifies the process of launching a new business, including a nonprofit organization.
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