How To Start a Nonprofit in Illinois
Nonprofits are organizations that address a problem or provide a service without seeking a financial return. If you want to help your community by using your experience and skills to start a nonprofit in Illinois but don't know where to start, FindLaw is here to help. The following steps lay out the actions you should take to create a tax-exempt Illinois nonprofit that complies with state and federal rules.
While most people think of nonprofits as tax-exempt organizations, not all nonprofits are exempt. Tax-exempt status is conferred on nonprofit corporations that qualify by the federal government and the state of Illinois. In the following sections, FindLaw will take you through the steps you need to take to form an Illinois nonprofit corporation and ensure it is tax-exempt.
Incorporating your nonprofit adds a few extra steps and some expense to forming your organization. Still, it protects you and those working with the nonprofit from liability for its debts and obligations. The Internal Revenue Service (IRS) will grant a tax exemption to corporations and unincorporated associations. Still, operating unincorporated nonprofit associations may have unlimited personal liability should they be sued for damages.
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Find a Unique Name for the Nonprofit
The first step you take when forming a nonprofit should be to come up with a name that best represents your organization and helps it forge an identity. The name must be unique because Illinois will not let you register your nonprofit organization using a name that has already been used. Fortunately, the Illinois Secretary of State has made it easy to check if a name has already been claimed on its website.
Illinois also places some restrictions on the words that you can include in the name of your nonprofit corporation. No corporate name can include the name of any established political party unless its organizers have the express consent of the party's state central committee. Additionally, the name 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 as a not-for-profit.
If you have a name that has not been claimed, but you aren't ready to file the paperwork for incorporation, you may reserve the name for 90 days. The reservation may be made by either filing a Form NFP-104.10, Application for Reservation of Name, or filing a written request with the name and a short description of the corporation's purpose with the Secretary of State Department of Business Services.
Appoint a Registered Agent and Office
Illinois requires every corporation to appoint a registered agent and a registered office. There is a public record of the name and address of the person upon whom any service of process may be made. Any communication to the corporation from the Secretary of State will also be sent to this address.
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, and P.O. box numbers are not permitted.
Prepare and File Your Articles of Incorporation
Articles of incorporation are the documents that have been formally filed with the Secretary of State to create an Illinois corporation. The Secretary of State provides a fillable form that can be used to form a not-for-profit corporation, but the articles can't be filed online. It should be noted that the language on the Illinois form does not include specific language the IRS will be looking for when it is considering your nonprofit's tax-exempt status, so it must be added separately.
You will be required to state the name and purpose for which your nonprofit corporation is being formed. Illinois requires this statement to list a specific purpose, and it will not accept any statement that is too broad or vague. The Secretary of State will also not accept language that implies the nonprofit corporation was formed for for-profit purposes.
Illinois has a list of 35 different purposes for which a not-for-profit corporation may be formed. It includes such varied items as operating cooperatives, condominium administration, and the provision of debt management services. However, suppose you are planning on seeking tax-exempt status from the IRS. In that case, your organization's purposes should be limited 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 has its own requirements for a statement of purpose that include statements that it will not engage in activities unrelated to its exempt purpose or pursue prohibited political or legislative activity. Finally, the IRS will be looking for a dissolution clause that ensures the nonprofit's assets will either be donated to another 501(c)(3) on dissolution or handed over to the government.
Name Directors and Hold an Organizational Meeting
Illinois nonprofit corporations must have at least three directors, but there is no requirement that they are state residents or corporation members. Restrictions or qualifications for serving as a director may be included in the articles of incorporation or bylaws.
The initial organizational meeting of your nonprofit corporation's board of directors is a significant event for the organization because the board members should vote on two things necessary to corporate governance and nonprofit status. The first issue is the adoption of corporate bylaws that set forth the rules regarding how it will be run. The second is the adoption of a conflict-of-interest policy. The IRS usually requires nonprofits to have both before granting them tax-exempt status.
Apply for an Employer Identification Number (EIN)
Even if you have no intention of hiring employees for your nonprofit corporation, it is still crucial that it get an Employer Identification Number (EIN) before applying for an IRS exemption. The EIN serves as a unique nine-digit identifier that the IRS uses for tracking purposes, which includes tracking nonprofit organizations that have applied for federal tax exemptions. Additionally, an EIN is required for a corporation to open a bank account.
Corporations that apply on the IRS website will be issued their free EIN instantly. Organizations can also request an EIN by filing an IRS Form SS-4 application by mail or fax. Be sure that you apply for an EIN using the IRS website IRS.gov because some search engines will connect you with businesses that charge a fee to sign you up for a free EIN.
Apply for an IRS Tax Exemption
While you may have registered your not-for-profit corporation with the state of Illinois, it will not be a tax-exempt organization until it applies for an exemption with the IRS. Being designated an organization that is exempt under Section 501(c)(3) of the Internal Revenue Code confers two significant benefits on nonprofits:
- An exemption from paying the federal income tax
- Contributions to your nonprofit can be deducted from the donor's income on their federal income tax returns
Your organization will need to file a Form 1023 or a streamlined Form 1023-EZ with the IRS to apply for exempt status. To use the Form 1023-EZ, your nonprofit must not have had gross receipts of more than $50,000 in the three prior years, not be expecting to have gross receipts of more than $50,000 in the next three years, have assets valued at less than $250,000, and meet certain other qualifications. The filing fee for Form 1023-EZ is $257 and $600 for the standard Form 1023.
The IRS will issue your organization a determination letter if it finds it qualifies as an exempt organization. The IRS will also add the name of your corporation to its searchable list of exempt organizations that it maintains on its website so potential donors can verify that it has received an exemption.
Despite being exempt from paying the federal income tax, exempt organizations still need to file a Form 990 informational return each year. Organizations that fail to file Form 990s for two consecutive years may lose their IRS exemption.
Automatic Illinois Income Tax Exemption
Corporations that receive federal tax exemptions are automatically exempt from the Illinois income tax. Additionally, the organization is not required to file any informational returns with the state. However, if your nonprofit corporation does not receive a federal exemption, it must file state income tax returns each year.
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 the sales tax exemption, an organization must send a request directly to the Illinois Department of Revenue, Sales Tax Division that includes copies of its:
- IRS determination letter
- Articles of incorporation
- Any other document that may help in determining its status
Register With the Illinois Attorney General
Illinois law requires that all charitable organizations or fundraisers 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's three highest-paid employees were paid
- The value of the organization's assets and liability at the end of the year
- Both the initial registration and the annual reports are available to the public
Have Additional Questions?
Setting up a nonprofit corporation can sometimes seem overwhelming if you have no experience. That's why many people starting up new nonprofits speak with a local attorney for legal advice on doing everything correctly.
You can also use a DIY nonprofit formation tool that will walk you through the registration process so that your nonprofit corporation is set up correctly and will be entitled to a federal tax exemption.
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