Nonprofit organizations arise for dozens of purposes. However, they are not designed to line people’s pockets. Nonprofit organizations aim to raise money to further their mission and help people in need live an improved quality of life.
Some of the benefits of starting a nonprofit organization include:
- Acquiring separate entity status
- U.S. Postal Service discounts
- Credibility
Setting up a nonprofit organization in Illinois is not an overnight process. It could take anywhere from 1 to 6 months after filing before receiving a determination letter, also known as a tax-exempt status from the IRS.
Illinois has approximately 22,743 nonprofit organizations. Some well-known nonprofits in the state include Gift of Adoption Fund Inc., Critter Camp Exotic Pet Sanctuary, and The Chicago Coalition for the Homeless.
1. Select a name for your organization
Your nonprofit’s name is also its brand and must meet Illinois state requirements. The organization name also needs to be completely different from any business or entity operating in the state of Illinois
. It, therefore, cannot contain words that denote established political parties, such as “Democrats,” “Republican,” or “Democratic.” Additionally, a 90-day name reservation is also available or a fee of $25.
Furthermore, the name of your nonprofit should contain the word “incorporated” or “corporation” or, at the very least, abbreviations like “Corp.”
Additionally, the name of the nonprofit in Illinois must include the letters “NFP” at the end of the name, more so if the name of the organization suggests that the nonprofit is designed for any other purpose other than what is laid out in the Non-for-profit Corporation Act.
Head over to the Illinois General Assembly’s official guidelines for guidance on how to choose a name for your nonprofit in Illinois.
2. Nominate an Illinois registered agent
A registered agent is an individual who is a designated point of contact for the Illinois nonprofit. This individual will be responsible for receiving official mail, legal documents, and notices on behalf of the nonprofit.
Anyone within your nonprofit organization, including yourself, may be nominated as a registered agent; however, the individual must meet specific requirements:
- Must be physically located in Illinois: The registered agent must be physically located in Illinois with an Illinois street address and not a P.O. box address.
- Have a physical office: The Illinois agent must be available at the listed street address.
- Maintain office hours: The registered agent must make themselves available during normal business hours to receive any and all documentation on the nonprofit’s behalf.
3. Recruit your board members
When choosing directors and officers for your nonprofit, you need to know Internal Revenue Service and residency requirements.
Directors are the governing body, cabinet, or management of your nonprofit, and the officer is responsible for keeping the minutes of the organizational meetings held between directors and members.
Directors in Illinois need to be 18 years or older, and no residency or membership is required. The Board of Directors nominates the officer, and the same person may hold two or more offices.
4. Consent to bylaws and conflict of interest policy
In order to complete your Illinois nonprofit organization’s application, recognition of exemption under section 501(c)(3) of the internal revenue code is required. The application form needed to start the process is Form 1023.
Two documents are required for a successful outcome:
- The first document is a bylaws document that acts as the nonprofit operating manual and basically outlines the operating procedures and so forth.
- The conflict of interest policy is the second document and is basically a collection of rules put in place to ensure that all decisions made ultimately benefit the nonprofit organization and not individual members’ personal agendas.
The bylaws do not need to be filed with the Illinois Secretary of State; however, they must be kept on file for your internal operating purposes.
5. Select an Illinois nonprofit startup corporation structure
There are four corporate structures for nonprofits in Illinois as follows:
- Public benefit corporations: These nonprofits are created for charity purposes, act as a social welfare organization or civic league.
- Religious corporations: These nonprofits are solely for religious purposes, such as a church.
- Mutual benefit corporations: These nonprofits may or may not pursue state and IRS tax-exemptions.
- Mutual benefit common interest development corporations: These nonprofits are created under the Davis Stirling Common Interest Development Act to oversee common interest development, such as a homeowner’s association.
6. Prepare and file nonprofit Articles of Incorporation
Your nonprofit articles of incorporation earmark the creation of your organization. It documents when and where the organization was developed and captures pertinent information to verify the nonprofit’s existence.
Complete Form NFP 102.10 to file your Articles of Incorporation with the state
That said, the IRS will look for a few introductory provisions when vetting your 501(c)(3) tax exemption application, so you must meet both the state of Illinois’ requirements and IRS requirements to avoid unnecessary amendments or your application declined.
Here’s what your nonprofit articles of incorporation should state explicitly:
- Purpose: Your nonprofit must be limited to one or more of the following categories: Religious, Charitable, Scientific, Literary, Educational, Testing for pubic safety, Preventing cruelty to children or animals.
- Dissolution: Here you’ll need to state the purpose of the organizations’ assets and the consequences of dissolved assets.
Additionally, to get your 501(c)(3) tax exemption in order, you should use your nonprofit’s assets solely for the purposes sanctioned under section 501(c)(3).
If you have intentions of applying for tax-exempt status, certain allowable purposes will not qualify as exempt purposes by the IRS. That said, ensure that you understand the IRS 501(c)(3) requirements and refer to the specific tax-exempt language required by the state of Illinois.
The provisions required for 501(c)(3) eligibility can be found in this sample IRS document.
While some states require you to publish your articles of incorporation, the Illinois department of state does not require you to do so.
7. File an initial report
Nonprofit organizations in Illinois are not required to file an initial report.
8. Secure an EIN (Employer Identification Number)
An Employer Identification Number is also referred to as a Federal Tax Identification Number or Federal Employer Identification Number. It is a nine-digit number assigned by the IRS to identify your nonprofit or business entity. You can think of it as a social security number for your nonprofit.
While many people believe that only nonprofits who plan to hire employees need an EIN, all nonprofit organizations will need to apply for it. An EIN can be used to open a business bank account, submit 990 tax returns to the IRS, and apply for your 501(c)(3) compliance.
The form needed for your EIN is the IRS Form SS-4, and you may send the completed form back via phone, fax, mail, or online.
The ETA when using the online or phone method is almost instantaneous, while the fax option will take four working days, and the mail option will have you waiting anywhere between 4-5 weeks.
Please head over to this Understanding Your EIN document to guide you further.
9. Apply for federal tax exemption
While the process of applying for 501(c)(3) tax exemption may seem daunting, to say the least, the advantages that come along with obtaining tax exemption are numerous.
501(c)(3) compliance benefits:
- Having recognition, and credibility for your nonprofit
- Being exempt from IRS state income tax, federal, Illinois sales, payroll, and property taxes (more information can be found on the Illinois Department of Revenue website)
- Eligibility for grants on local, state, and federal levels. Lots of funders will only consider an application if you are registered as a 501(c)(3) entity and have your 501(c)(3) certificate to prove this.
- Allows you to give tax deductions to donors when they donate to your nonprofit
- A nonprofit or exempt organization in Illinois may qualify for nonprofit mailing privileges, such as discounted postage rates.
- Media outlets are also inclined to give discounted and even free announcements and press releases for nonprofits. Simply show them your 501(c)(3) certificate or tell them that you are 501(c)(3) compliant, and they will gladly make a public service announcement on your behalf.
These are just some of the benefits of being 501(c)(3) certified, and it is in your organization’s best interest to find out how this compliance can help your nonprofit save money and grow from strength to strength.
Now that you are aware of the benefits of obtaining a federal tax-exempt status, you’ll need to know how to qualify for it.
Here are the pre-requisites for federal tax exemption eligibility:
- The nomination of 3 directors, unrelated to each other
- Adopt bylaws and conflict of interest policy
- File articles of incorporation
- Have an EIN
Once you’ve fulfilled the requirements mentioned above, you may go ahead and file the 1023 form and apply for your nonprofit’s 501(c)(3) tax-exempt status. However, if you plan on running a smaller organization or expect your nonprofit’s gross income to be under $50,000 over the next three years, you can fill out the form 1023-EZ instead.
A determination letter will be sent to you stating the outcome of the application for exemption from federal taxes.
10. Apply for Illinois state tax exemption
When filing for tax-exempt status, the laws vary from state to state. As per Illinois law, nonprofit corporations or Division of Corporations are automatically exempt from Illinois corporate income tax. The only exception here is if your organization has “unrelated business or trade income.”
As a resident of the state, your Illinois nonprofit corporation automatically meets the requirements for sales tax exemption.
Additionally, your nonprofit may acquire a Consumer’s Certificate of Exemption(valid for five years) to gain sales tax exemption on business services and items used in the organization’s not-for-profit activities. In this case, you’ll need to complete the application form dr-5.
11. Other applicable permits and licenses
If you plan to get involved in fundraising for your Illinois nonprofit, you need to register for charitable solicitation. The process for applying for charitable solicitation is as follows:
- Complete Form C0-1 with the Illinois Attorney General’s office – Charitable Trust Bureau
- Submit a list of the organization’s directors and officers
- Attach Form 1023 or 1024
- Paying a filing fee of $15
Additional state registration and reporting requirements
If you plan to get involved in fundraising for your Illinois nonprofit, you need to register for charitable solicitation. The process for applying for charitable solicitation is as follows:
- Complete Form C0-1 with the Illinois Attorney General’s office – Charitable Trust Bureau
- Submit a list of the organization’s directors and officers
- Attach Form 1023 or 1024
- Paying a filing fee of $15
12. Submit an annual report
Nonprofits in Illinois are required to submit a yearly report at the end of each calendar year to the Illinois Secretary of State, Department of business, in Springfield, IL.
The relevant forms needed to submit annual reports are found on the Illinois Attorney General’s website.
Additionally, it’s a great way to show donors how your nonprofit has reached its goals.
Start your nonprofit’s first year by identifying its target market, your team, and your fundraising goals so you can make the most of donor outreach, community partnerships, and volunteer recruitment.
Costs of starting a new nonprofit in Illinois
The costs of starting a nonprofit will vary from state to state. Below we’ve listed the costs of starting a 501(c)(3) in the state of Illinois:
- Articles of Incorporation: $50 by mail or $77.75 online + optional $100 expedite fee
- Form REG-1: varies based on state tax accounts
- 501(c): $275 or $600 IRS fee
- Illinois Charitable organization Registration: $15
Next steps
After you’ve started your nonprofit, there are a few necessary steps that you should take to keep your organization running smoothly. Let’s take a closer look at them below:
Open a business bank account
- Maintain accounting and tax filing
- Ensure that your personal assets are kept separate from your nonprofits’ assets
To open a bank account, you will need to provide:
- Your EIN
- A copy of your articles of incorporation
- A copy of your organization’s bylaws.
Hire a business accountant
- Simplify payroll and bookkeeping
- Prevent your nonprofit from avoiding penalties and tax errors
- Manage your nonprofit’s funding
Obtain insurance
- Focus on growing your nonprofit
- Manage risks
You may opt for General liability, Personal liability, or Worker’s compensation insurance.
Build a website
As we mentioned earlier, you may want to create a website for your organization to legitimize your business or give it more credibility. A dedicated website is also one of the best ways to share your nonprofit’s vision, mission, and story with supporters. Consequently, it’s also a great way to announce upcoming events and goals.
Sign legal documents
One aspect that tends to get overlooked is signing legal documents in your personal capacity instead of as an authorized representative of your nonprofit.
If you’ve appointed yourself as a registered agent of the nonprofit, then the following tips will help avoid personal liability:
- State the registered name of your nonprofit
- Use your name and signature
- State your position/role in the organization as its authorized representative
When signing legal documents on behalf of the nonprofit, it is important that you do so in your capacity as the registered agent, as opposed to your capacity as an individual.
Example: Instead of signing your name only, state the name of the nonprofit and then your name and position within the organization before signing.
FAQs
You don’t need to be a US citizen or resident in order to start a nonprofit corporation in the United States of America. However, in most cases, the costs involved in starting a nonprofit outweigh the potential benefits. This and the process of applying for a nonprofit organization discourages many people from starting nonprofits.
The cost of a 501(c)(3) is approximately $600 as of 2021. Your nonprofit’s income will not affect this figure, and it is nonrefundable. There is also no way to waive this fee, so it is compulsory.
You’ll need the following paperwork to get your Illinois nonprofit up and running: Form NFP 102.10, IRS Form SS-4, IRS Form 1023, IRS Determination Letter, Form REG-1, Illinois Sales Tax Exemption letter of request, Form CO-1, and URS Charitable Registration.
Starting a nonprofit without any money is not an option. However, there are ways that you can raise money to start a nonprofit organization. One of those ways is to start a crowdfunding account to make people aware of the need in the community and how you plan on fulfilling it.
There are a few necessary steps to starting a nonprofit organization in Illinois. You’ll need to compete and file articles of incorporation, bylaws and hold an official meeting with your Board of Directors. You’ll also need to apply for an employer identification number, federal and state tax exemption, register as a charity, and keep your nonprofit in line with annual compliance requirements.
