Starting a nonprofit in Illinois offers a unique opportunity to make a lasting impact on your community and beyond. However, the process involves numerous steps, including defining your mission, navigating legal regulations, and securing tax exemptions. This comprehensive guide will walk you through each crucial phase, ensuring your nonprofit’s successful legal establishment.
1 – Define Your Mission
Understand the Need
First and foremost, you must identify the needs your nonprofit will address. Research local community issues and consider how your organization can offer meaningful solutions.
Formulate Your Mission Statement
Once you’ve understood the need, develop a clear and compelling mission statement. This should outline your organization’s purpose and the community it serves. The mission statement will guide your organization’s activities and communicate your purpose to potential supporters.
2 – Laws and Regulations for Nonprofits in Illinois
Starting a nonprofit in Illinois requires understanding and adherence to a variety of laws and regulations. From the formation of the organization to its operation, fundraising, and reporting, every aspect is governed by specific legal provisions. Here are the key legal areas Illinois nonprofits need to consider:
Illinois Not-for-Profit Corporation Act
The Illinois Not-for-Profit Corporation Act is the primary state law that governs the incorporation, operation, and dissolution of nonprofit organizations in Illinois. The Act provides the legal framework for nonprofits, including rules for the appointment and conduct of directors and officers, procedural requirements for meetings and decision-making, standards for fiscal management, and guidelines for amendments to the Articles of Incorporation and bylaws.
The Act stipulates that a nonprofit must have at least one director and that it must maintain comprehensive records, including the minutes of all meetings, a list of all members (if it has members), and accounting records. Additionally, the Act covers the process for legal disputes, conflict of interest policies, indemnification and liability of directors and officers, and processes for mergers and dissolution.
Charitable Solicitation Law
If an Illinois nonprofit intends to solicit public contributions, it must register with the Charitable Trust Bureau of the Illinois Attorney General’s Office under the Illinois Charitable Solicitation Act. This law also requires the submission of an annual financial report detailing the organization’s revenue and functional expenses.
Employee Regulations
Nonprofits with employees need to comply with several state and federal employment laws, including minimum wage, anti-discrimination, and workplace safety regulations. In Illinois, nonprofits are also required to carry workers’ compensation insurance if they have one or more employees.
Lobbying and Political Activity
Under the IRS rules, a 501(c)(3) organization may engage in some lobbying, but it cannot be a substantial part of its activities. Moreover, they are prohibited from directly or indirectly participating in any political campaign on behalf of (or in opposition to) any candidate running for public office.
The complexity of legal requirements makes it crucial for new nonprofits to seek advice from knowledgeable attorneys or consultants. Noncompliance can lead to penalties and risk the organization’s tax-exempt status, so it’s worth investing in expert advice to get your nonprofit off to a strong start.
3 – Choosing a Name for a Nonprofit in Illinois
When starting a nonprofit organization, choosing the right name is a critical first step. The name of your nonprofit carries considerable weight. It represents your mission, becomes part of your brand, and communicates your purpose to the stakeholders. In Illinois, the process of selecting and securing a name for your nonprofit involves several key steps.
Reflect on Your Organization’s Mission and Values
The name of your nonprofit should reflect its mission and core values. It should convey the purpose of the organization and resonate with the community you aim to serve. Think about the impact you want to make and consider how your organization’s name can reflect that goal. Be sure to select a name that is distinct, memorable, and easy to understand.
Legal Requirements
Under Illinois law, the name of your nonprofit corporation must be distinguishable from other business entities registered in the state. This means that if another organization has already registered a particular name, you won’t be able to use it for your nonprofit.
To avoid potential legal disputes, it’s also important to ensure that the name you choose doesn’t infringe on any trademarks. Conducting a trademark search through the U.S. Patent and Trademark Office database can help you avoid potential legal issues down the road.
Conduct a Name Search
Before you commit to a name, you’ll need to check its availability. You can do this by conducting a name search on the Illinois Secretary of State’s website. The online database provides information about all business entities that are already registered in the state.
Name Reservation
Once you’ve chosen an available name, you can reserve it with the Illinois Secretary of State for up to 90 days. This is done by filing a Name Reservation application and paying a small fee. Although name reservation is not mandatory, it can be a good idea if you’re not ready to file your Articles of Incorporation but want to prevent others from registering the name you’ve chosen.
Choosing the right name for your nonprofit is a significant step. It sets the tone for your branding and public perception. Take the time to choose a name that is unique, representative of your mission, and complies with Illinois’s legal requirements.
4 – Create Bylaws
Once you have decided on a name, the next step entails drafting effective bylaws. The bylaws serve as the rulebook for your organization and provide detailed guidelines for its internal governance and operation. Let’s dive into the process and key elements that should be included when drafting bylaws for your Illinois nonprofit.
Purpose of Bylaws
Bylaws are an essential internal document that dictates how your nonprofit operates. They define your organization’s structure, provide guidance to resolve internal disputes, and set the framework for decision-making. Importantly, they help ensure your organization is governed effectively, transparently, and consistently.
Key Elements of Bylaws
When drafting bylaws, consider including the following key sections:
1 – Organization Name and Purpose
Although this information is contained in your Articles of Incorporation, it should also be restated in your bylaws.
2 – Board of Directors
Detail the size of the board, the roles of each board member, term lengths, officers’ responsibilities, and processes for electing and removing directors. You should also outline how to fill vacancies and set meeting schedules, notice requirements, and quorum rules.
3 – Membership
If your organization will have members, clearly define the classes of membership, rights, and responsibilities, how members are admitted or removed, and the meeting procedures.
4 – Committees
If your organization plans to have committees, specify their purpose, how they are formed, and the extent of their authority.
5 – Financial Procedures
Outline the fiscal year of the organization, procedures for budget approvals, who can sign checks, how financial records will be kept and reported, and the process for an audit, if necessary.
6 – Conflict of Interest Policy
Include a policy to handle potential conflicts of interest that could arise among board members and key employees.
7 – Indemnification
To protect directors, officers, and employees against certain liabilities, including an indemnification clause consistent with Illinois law.
8 – Amendment Procedure
Provide a process for making amendments to the bylaws in the future. This usually requires a supermajority vote of the board of directors.
9 – Dissolution Clause
Specify how assets will be distributed upon dissolution of the nonprofit, ensuring it aligns with 501(c)(3) requirements.
Legal Review and Adoption of Bylaws
Once the bylaws are drafted, it’s advisable to have them reviewed by a legal professional experienced in nonprofit law. This ensures compliance with Illinois law and federal requirements for tax-exempt organizations.
Once finalized, the bylaws need to be formally adopted by your board of directors. This usually occurs at the organization’s first board meeting. The adoption of the bylaws should be recorded in the meeting minutes, and each director should have a copy of the adopted bylaws.
Creating bylaws can seem complex, but it’s a critical step in establishing your nonprofit’s operating rules and procedures. Take the time to draft comprehensive bylaws that provide a strong foundation for your organization’s operations and governance.
5 – Form a Board of Directors
The board plays a significant role in governing the organization, making strategic decisions, and ensuring the nonprofit stays true to its mission. Here are some key considerations when forming a Board of Directors for your nonprofit in Illinois.
Understanding the Role of the Board
The board serves as the governing body of your nonprofit and is responsible for overseeing the organization’s operations and management. They make strategic decisions, set policies, oversee financial management, and hire and supervise the executive director or CEO. Board members must act in the best interest of the organization, demonstrating duties of care, loyalty, and obedience to the nonprofit’s mission.
Board Composition
In Illinois, a nonprofit board must consist of at least one director, but it’s generally beneficial to have more. Having a variety of perspectives can strengthen decision-making and allow for a division of responsibilities. Consider a mix of skills and backgrounds that align with your nonprofit’s mission and needs. This could include professionals from fields like law, finance, marketing, or the specific field in which your nonprofit operates.
Board Recruitment
Identifying and recruiting potential board members is a critical process. Candidates should be people who are passionate about your nonprofit’s mission and willing to commit their time and expertise. Develop a list of potential board members through networking events, existing connections, or recommendations from colleagues and stakeholders.
Before inviting an individual to join the board, make sure they understand the responsibilities and the commitment involved. This includes attending regular board meetings, participating in strategic planning, overseeing the nonprofit’s operations, and potentially leading or serving on committees.
Legal Duties of Board Members
Board members of Illinois nonprofits must fulfill the following legal duties:
1 – Duty of Care
Board members must perform their responsibilities in good faith and with the care an ordinarily prudent person in a similar position would exercise under similar circumstances.
2 – Duty of Loyalty
Board members must act in the interest of the nonprofit and not for personal gain. They must avoid conflicts of interest.
3 – Duty of Obedience
Board members must ensure the nonprofit stays true to its mission and obeys all relevant laws and regulations, including the Illinois Not-For-Profit Corporation Act and the IRS rules for tax-exempt status.
Board Policies
Once you have recruited your board, establish clear policies on board conduct and operations. This may include a conflict of interest policy, a document retention policy, and a whistleblower policy. It’s also advisable to provide new board members with an orientation to understand the nonprofit’s mission, programs, bylaws, and their responsibilities as board members.
6 – File a Certificate of Incorporation
Once you have defined your nonprofit’s mission, chosen a name, and established your bylaws and board of directors, the next step to officially form your nonprofit in Illinois is to file the Certificate of Incorporation (also known as the Articles of Incorporation). Here is a detailed guide on how to do this.
Understanding the Certificate of Incorporation
The Certificate of Incorporation, also known as the Articles of Incorporation, is a legal document that officially establishes your nonprofit corporation in the state of Illinois. Filing this document is a necessary step towards obtaining tax-exempt status from the IRS and the Illinois Department of Revenue.
Information to Include in the Certificate of Incorporation
In Illinois, your Certificate of Incorporation must include:
- Name of the Corporation: This should match the name you have reserved with the Illinois Secretary of State’s office.
- Duration of the Corporation: Most nonprofits choose “perpetual” duration, meaning the nonprofit will continue to exist until it is legally dissolved.
- Purpose: This statement should express the specific purpose of the organization. If you plan to apply for federal tax-exempt status, make sure this section includes language required by the IRS.
- Registered Agent and Registered Office: The registered agent is an individual or a company that agrees to accept legal mail on behalf of the corporation. The registered office is the street address (P.O. Boxes are not acceptable) in Illinois where the registered agent can be reached.
- Names and Addresses of the Initial Directors: In Illinois, you must have at least one director. If you wish, you can list more.
- Name and Address of the Incorporator: The incorporator is the person who prepares and files the Certificate of Incorporation.
Filing Process and Fees
After your Certificate of Incorporation is prepared, it should be submitted to the Secretary of State’s Department of Business Services, along with the appropriate filing fee.
Upon receipt of your filing and fee, the Secretary of State will review your document. If everything is in order, they will send you a confirmation of your corporation’s existence.
Filing the Certificate of Incorporation is a significant step in the process of starting a nonprofit in Illinois. Remember to ensure all the details are correctly recorded and that the document meets all requirements to avoid delays in the approval process. Consider seeking legal counsel to ensure all your documentation is correctly prepared and filed.
7 – Obtain an Employer Identification Number (EIN)
Once your Certificate of Incorporation is filed and approved by the Secretary of State, your next step is obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This EIN, also known as a Federal Tax Identification Number, is used by the IRS to identify your organization for tax purposes.
What is an EIN?
The EIN is a unique nine-digit number assigned by the IRS to businesses and organizations operating in the United States. It’s used to identify taxpayers that are required to file various business tax returns. Nonprofits need an EIN for a variety of reasons, including applying for tax-exempt status, opening a bank account, filing tax returns, and hiring employees.
How to Obtain an EIN
Obtaining an EIN is a relatively simple process that can be done online, by fax, or by mail. However, the IRS prefers the online application method as it’s the quickest way to receive your EIN.
Online Application
The online EIN application is available on the IRS website. To apply online, you must have a valid taxpayer identification number (such as a Social Security Number) and complete the application in one session; the IRS does not save your progress. The online application is available Monday through Friday, 7 a.m. to 10 p.m. EST.
Once the application is completed and validated, you’ll receive your EIN immediately and can begin using it for most of your organization’s needs. However, it may take up to two weeks for the EIN to be permanently recorded in the IRS’s system.
Fax or Mail Application
If you choose to apply by fax or mail, you must complete Form SS-4, “Application for Employer Identification Number”. The form, along with its instructions, is available on the IRS website. For fax applications, the IRS typically responds within four business days. For mailed applications, expect to wait approximately four weeks.
Important Considerations
Remember, once assigned, your EIN becomes the permanent federal taxpayer identification number for your organization. Always include it in all correspondence to the IRS and Social Security Administration. Keep your EIN confidential and only provide it to those who need it for legitimate business purposes, such as your bank, your accountant, or the IRS.
Obtaining an EIN is an essential step when forming a nonprofit organization in Illinois. Once you’ve secured your EIN, you’re one step closer to applying for federal and state tax exemptions and fully operationalizing your nonprofit.
8 – Apply for Tax Exemption
Once your nonprofit corporation has obtained an Employer Identification Number (EIN), you’re ready to apply for tax-exempt status. Achieving tax-exempt status is critical for a nonprofit because it means the organization’s income is not subject to federal or state taxes, and it allows donors to make tax-deductible contributions. This process involves both federal and state applications.
Federal Tax-Exempt Status 501(c)(3)
At the federal level, nonprofit organizations seek tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. This exempts the nonprofit from federal corporate income tax and allows donors to receive a tax deduction for their contributions.
To apply for 501(c)(3) status, your organization needs to complete and submit IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The form you use depends on your organization’s size and nature. Form 1023 is comprehensive and lengthy, while Form 1023-EZ is simpler and shorter, but only available to smaller nonprofits meeting certain criteria.
Both forms require information about your organization’s finances, structure, governance, operations, and programs. If you’re completing Form 1023, you will also need to attach your Articles of Incorporation and your bylaws.
The IRS review process can take several months, so it’s wise to apply as soon as possible after forming your nonprofit corporation. If your application is approved, the IRS will send a Determination Letter recognizing your nonprofit’s tax-exempt status.
Illinois State Tax-Exempt Status
In addition to federal tax exemption, Illinois nonprofits also need to apply for state-level tax-exempt status.
Illinois nonprofits are generally exempt from the Illinois state income tax, but you must apply for this exemption with the Illinois Department of Revenue. You can do this by completing Form IL-1023-C, Application for Recognition of Exemption. Submit the completed form, along with your IRS Determination Letter, to the Illinois Department of Revenue.
Illinois nonprofits may also be eligible for other state tax exemptions, such as sales and use tax exemptions. To obtain these, complete and submit Form STAX-1, Application for Sales Tax Exemption, to the Illinois Department of Revenue.
Remember that each form has its specific requirements, so it’s important to review the instructions carefully before submitting. It’s also advisable to consult with a legal professional or an accountant experienced in nonprofit tax issues to ensure that your applications are correctly prepared.
Gaining tax-exempt status is a significant milestone for your nonprofit. It not only exempts your organization from income tax but also enables your donors to make tax-deductible contributions, enhancing your nonprofit’s ability to fundraise and support its mission.
9 – Obtain Necessary Licenses and Permits
Starting a nonprofit in Illinois involves more than just filing the Certificate of Incorporation and obtaining tax-exempt status. Your organization may also need to obtain various licenses and permits at the local, state, and federal levels depending on the activities and services your nonprofit intends to offer. Here is a guide to help you understand this crucial step.
Understand Your Requirements
The first step in obtaining necessary licenses and permits is to understand which ones apply to your organization. The specific licenses and permits your nonprofit needs will depend on its activities. For instance, a nonprofit that sells goods may need a seller’s permit, while one that serves food might need a health permit.
Local Licenses and Permits
Local licenses and permits are issued by city or county governments and vary depending on your location and the nature of your organization’s activities. Examples might include a general business license, a zoning permit, or a health permit. Check with your local city or county clerk’s office or visit their websites for information about what licenses and permits are required for your nonprofit.
State Licenses and Permits
Some nonprofits may require state-level licenses or permits, depending on their activities. These might include a charitable solicitation license, a sales tax exemption permit, or professional licenses if your organization provides certain types of services, such as healthcare or education.
In Illinois, nonprofits that intend to solicit donations must register with the Illinois Attorney General’s office before beginning any fundraising activities. You can do this by completing Form CO-1, Charitable Organization Registration Statement, and submitting it along with the necessary supporting documents.
Additionally, if your organization will be conducting any raffles or bingo games as part of its fundraising efforts, you’ll need to apply for a license from your local city or county, as well as a license from the Illinois Department of Revenue.
Federal Licenses and Permits
While most federal licenses and permits apply to specific industries such as broadcasting, aviation, or alcohol manufacturing, there are a few that may apply to nonprofits. For example, nonprofits that conduct activities related to wildlife, fish, and plants may require permits from the U.S. Fish and Wildlife Service.
Keeping Up with Renewals
Remember, many licenses and permits must be renewed periodically. Keep track of all expiration dates and renewal requirements to maintain your nonprofit’s good standing.
It’s important to note that this guide provides a general overview of the types of licenses and permits your nonprofit may need, but it isn’t exhaustive. The specifics will depend on your nonprofit’s activities and location. Be sure to research thoroughly or consult with a legal professional to ensure your nonprofit meets all legal requirements. It’s always better to be over-prepared when it comes to legal compliance. The consequence of operating without necessary licenses or permits can be serious, including fines, penalties, and even dissolution of your organization.
Conclusion
Starting a nonprofit in Illinois is a noble endeavor that requires careful planning and adherence to both state and federal regulations. From defining your mission to obtaining necessary licenses and permits, each step paves the way for your organization’s legal existence and operational success. Remember, the journey may seem complicated, but the reward of making a positive impact on your community will make all the hard work worthwhile.
