Every day, individuals like the clients we serve are inspired to start a nonprofit to help serve their communities. This blog posts illustrates the steps needed to form a nonprofit organization and also discusses the steps taken to file to earn a federal tax exempt status.
Starting a nonprofit offers several benefits. They include the ability to solicit funds from people who want their donations to be tax-exempt, apply for grants and keep from having to spend valuable donations on corporate taxes.
The first step is filing an articles of incorporation with the Secretary of State. The Articles of Incorporation is a legal document and forms a corporation. This document is also called the “charter’’ which outlines your non-profit and records the foundation as an official non-profit organization. This document will include information about the company's purpose, stock structure, and directors, among other things. It is essential to get these documents right from the outset; if they're unclear or do not follow all required parameters, it could lead to significant problems in the future. This is a prerequisite for any tax exemption, but keep in mind that only certain kinds of charities fall into that category. Regardless of future tax-exempt status, it is required to complete and submit two (2) identical copies of the Articles of Incorporation, and payment, one copy will be the original.
The articles of incorporation includes a few things. First is the corporate or business name. It is advised to search whether the name is incorporated by another nonprofit, if the name is currently used then the name may need to be changed. The Secretary of State requires that the names of nonprofits to be different for its records. The name must end with the letters NFP if the corporate name has anything that makes it seem like the corporation is organized for any purpose other than a non-profit purpose. A business name can also reserve a name for a period of 90 days for a $25 fee. All that is needed is to make a written request, listing the name and a brief description of the corporate purpose that is done with a form provided by the state.
Next is determining the registered agent and office address. The registered agent is the person who will receive any legal documents from either the Secretary of State or any other agency. The office is the location where the documents will be sent. The registered agent and office are where service of process is sent. The registered agent must be a person that lives in Illinois. The office or location must also be in the same state as the Secretary of State. If any of the information changes, the office must be sent a form indicating the change.
Next, is indicating the duration of the non-profit. It can be a certain time or perpetual.
Next and importantly, is the business purpose, which simply states the purpose of the nonprofit. This is important to show the Secretary of State that the purpose is one of the 35 purposes that falls under purposes for non-profits. Nonprofits may be organized for any one or more of the following or similar purposes stated in the statute for non profit purposes including but not limited to: charitable; educational; civic; patriotic; political; religious; social; literary; athletic; scientific; research; agricultural; professional, commercial, industrial or trade association; promoting the development, establishment or expansion of industries; telephone service on a mutual or cooperative basis; operation of a community mental health board; any purpose permitted to be exempt from taxation under Section 501(c) or 501(d) of the U.S. Internal Revenue Code, as now in or hereafter amended; any purpose that would qualify for tax-deductible gifts under the Section 170(c) of the U.S. Internal Revenue Code, as now or here- after amended. (any such purpose is deemed to be charitable under subsection (a)(1) of this Section).
The purpose can be more detailed, the only caveat is that any language that may indicate or imply a business purpose is not permitted.
Assuming that a nonprofit owner has decided to apply the nonprofit to tax exempt, the Secretary of State requires the application to elaborate on the purposes in this purpose section under a separate section for Other Provisions. This other provisions can also be part of bylaws, which is a document that sets out the policies and operations of the nonprofit that members of the organization must follow and the Bylaws also describe what happens if the organization dissolves or if someone does not follow the guidelines. The bylaws also include annual meetings and dates which you can choose. The bylaws also discuss how members are added or removed. It also discusses how financial decisions and purchases are made by the directors.
I can also create this for you. I advise that the bylaws are made though, especially during the formation of the nonprofit because members and partners may feel enthusiastic at the outset but like the articles of incorporation, when something goes array, there needs to be policies and procedures in place.
A nonprofit is its own entity. So all nonprofits are granted many powers by statute including: the power to sue and be sued; complain and defend in the corporate name; to have and affix a corporate seal; to purchase, lease, acquire, hold, use, own, or otherwise deal in and with any real and personal property; to make contracts and incur liabilities; to elect or appoint officers; to make and alter by-laws; to loan money for its corporate purposes; to have and exercise all powers necessary or convenient to effect any or all of the purposes for which the corporation is organized.
The next part is important. There must be at least three (3) directors. They do not have to be Illinois residents or corporation members, but you may require these restrictions or impose any other qualifications you choose. Creating a board of directors for an organization can be an invaluable decision. This dedicated and experienced group of advisors can bring their expertise from a wide range of fields to help the organization make well-informed decisions that will lead to success. In addition to providing sound guidance and strategy, the board of directors hold executive management accountable to ensure that their plans are executed properly with the right resources in place. They also keep up with trends in the market in order to develop new strategies and adjust existing plans as needed. Finally, by bringing together inspired individuals with different backgrounds, a board of directors can provide fresh perspectives and inject new ideas into the organizational mission. By leveraging the knowledge and experience of its board members, any organization can set itself up for long-term success. A board of directors should not be taken lightly, however; it must be assembled thoughtfully to ensure that all stakeholders have adequate representation. Properly cultivated and used correctly, it could be one of the most powerful tools an organization has at its disposal.
One or more incorporators (the person in charge) may organize a corporation under this Act. An incorporator may be either a person age 18 or older or a corporation, domestic or foreign, whether nonprofit or otherwise.
Below or following the purpose clause, you can list any other provisions regarding the internal affairs of the corporation you want to have included as part of the Articles of Incorporation. These may include:
This requires an elaboration of purposes, how to achieve them, procedures for dissolution, etc., this is the place to make those statements. This section must be written in language and format that conforms to the specifications of the IRS Code.
Restrictions and Qualifications
List who can be a member, an officer, or a director and what duties each must perform. This information does not have to be a part of the Articles of Incorporation, but if it is not, such information should be a part of the bylaws.
List any other regulation for the governing of the internal affairs of the cor- poration or leave these for the by-laws.
Cost and Filing
Next is cost and filing, the department of the Secretary of State offers the review and, if approved, the filing of articles of incorporation on an expedited basis within 24 hours of receipt in either the Springfield or Chicago office. There may be a requirement to do this in person. So we can go together. But there may be an electronic filing. Filing fee is $50 We can expedite the filing for $25, so $75 total. When approved, the Secretary of State will stamp the date of filing on both copies and return one copy to the incorporators or their representative.
Curington Law can do this for clients for a fee that clients can utilize. It is also advised that clients get an Employer Identification Number, or EIN, which identifies your nonprofit as a business entity in the United States to the IRS.
Federal Exempt Tax Status
The next step is applying for Federal Exempt Tax status, requires a separate filing. Securing 501(c)(3) status with the Internal Revenue Service (IRS) is an important step for any organization or business seeking tax-exempt status. Establishing 501(c)(3) status means that the organization is exempt from income tax, giving donors to the cause the ability to write off and receive tax deductions on their gifts. This must be done after the nonprofit has been incorporated and has received the filed articles of incorporation from the Secretary of State. Next is obtaining the proper application form from the IRS, and completing and submitting the application, along with photocopies of the articles of incorporation and bylaws, to the IRS. The IRS will notify incorporators of the states determination, and the annual reports that will be required in the future, after receiving the documents. If the nonprofit does not apply for or does not receive a federal tax exemption, the nonprofit must file federal income tax returns and pay the appropriate tax.
Illinois Income Tax
If the nonprofit receives a federal tax exemption, it is exempt from Illinois income tax. No reports need to be filed and no tax is due.
Illinois Sales Tax
Some nonprofits may qualify for an exemption from paying sales tax on goods purchased for the use of the organization if they are formed for exclusively charitable, religious or educational purposes or for senior citizens. To find out if you qualify, write a letter of request to the Illinois Department of Revenue, Sales Tax Division, and enclose photocopies of your articles of incorporation, bylaws, constitution, IRS exemption letter, or any other document that may help in determining registered agent status. The Department of Business Services will notify the registered agent of your status. If the nonprofit qualify for sales tax exemption, the registered person will be issued a letter ruling to that effect. The owner of the nonprofit may not use their nonprofit registration number or IRS number to claim exemption from Illinois sales tax.
Illinois Attorney General Registration
Certain charitable organizations must register with the Attorney General, Division of Charitable Trust and Solicitations, under either or both the Illinois Charitable Trust Act or the Illinois Solicitation Act. Information and forms may be obtained from the Office of the Illinois Attorney General.
Annual Reports to the Secretary of State
All nonprofits must file an annual report of officers and directors with the Secretary of State. The due date depends upon when the corporation was formed. The annual report is due before the first day of the corporation’s anniversary month each year. The anniversary month is the month in which the corporation was formed. Forms will be sent to the registered agent approximately 60 days before the due date. Failure to file an annual report may result in involuntary dissolution of the corporation.
Annual Reports to Other Government Agencies
The Internal Revenue Service, the Illinois Department of Revenue and the Illinois Attorney General may require other annual returns. Whether you must file a return and which return you will use depends in part on your status as a tax-exempt or non-tax-exempt corporation. To be sure of your obligations, please consult the proper agency.
Other Reports to the Secretary of State
Any change in the corporate name, duration or purpose will require that the articles of incorporation be amended, using the proper form. Also, should the corporation need to report a merger, dissolution or reinstatement, it should use the proper form. All forms for these reports are available from the Secretary of State and should be filed upon the occurrence of the particular event.
For more information about nonprofits, contact Curington Law, LLC at 312 803-1755 or online.