Forming Not-for-Profit Entities in Chicago, Illinois
If you are starting an organization whose mission and purpose is to further a social cause and provide a public benefit, such as a charity or foundation, you’ll want to create it as a nonprofit organization and take full advantage of the tax-exempt status a nonprofit offers. However, even if your organization isn’t being formed for the public good but instead merely to serve the needs of its members, you might still enjoy tax-exempt status and other benefits by forming it as a not-for-profit entity. A not-for-profit doesn’t earn profit for its owners, and all money brought in, whether earned through business activities or donations, goes into running the organization.
If you have a sports club or other organization formed for the benefit of its members rather than to turn a profit, the business formation lawyers at MacDonald, Lee & Senechalle, Ltd., can help you determine whether your organization qualifies as a not-for-profit. Our experienced business entity formation attorneys can advise you and assist you in every step of the process of creating a legal entity and applying for tax-exempt status consistent with the rules of Illinois and federal law. Contact our Chicagoland business law firm today to discuss your needs and goals.
What Is a Not-for-Profit Entity in Illinois?
A not-for-profit entity in Illinois is an organization that operates primarily for a purpose other than profit. However, a not-for-profit must be distinguished from a nonprofit, which is a separate type of legal entity, although both types of entities are governed by the same law in Illinois, namely the Illinois Not-for-Profit Corporations Act. One key difference is that nonprofits run themselves like a businesses and try to earn a profit (although they are limited in how those profits are spent), while not-for-profits do not try to earn a profit. Non-profits can have employees (so long as they are not paid through fundraising), but not-for-profits are run by volunteers. A non-profit organization is eligible for tax-exempt status under section 501(c)(3) of the Internal Revenue Code, while a not-for-profit could be tax-exempt under 501(c)(3), 501(c)(7), or some other provision.
Both non-profit and not-for-profit corporations differ from for-profit businesses in several ways, with tax-exempt status being the most important. But it’s essential to navigate through the complexities of forming a not-for-profit entity correctly. See below for some general guidance, but for advice and assistance specific to your organization, contact MacDonald, Lee & Senechalle, Ltd., to discuss your needs and goals with a team of knowledgeable and experienced Chicagoland business law attorneys.
Steps for Forming a Not-for-Profit Entity Under Illinois Law
Step 1: Initial Planning and Research
Before diving into the paperwork, conduct thorough research on the type of not-for-profit entity best suited for your objectives. This step includes understanding the regulatory framework, taxation, and necessary filings.
Step 2: Naming Your Not-for-Profit Entity
The organization’s name must be unique and should not closely resemble an existing entity’s name in Illinois. You can conduct a name search through the Illinois Secretary of State’s website to ensure availability. File Form NFP 104.10 with the Secretary of State to reserve your name.
Step 3: Draft Articles of Incorporation
Your Articles of Incorporation is a critical document outlining your organization’s purpose, name, address, and other key details. It needs to be filed with the Illinois Secretary of State to legally establish your not-for-profit entity. To qualify for tax-exempt status under IRC Section 501(c)(3), the Articles of Incorporation must contain a clear purpose statement and a clause directing the disposition of the organization’s assets upon dissolution.
Step 4: Appointing a Registered Agent
Choose a Registered Agent who is a resident of Illinois or a corporation authorized to do business in the state. The agent will receive all legal notifications on behalf of the organization.
Step 5: Preparing Bylaws
Draft the bylaws to govern the operation of your not-for-profit entity. These bylaws should set forth the organization’s internal rules, such as how meetings are conducted and how officers are elected.
Step 6: EIN and Tax-Exemption
Apply for an Employer Identification Number (EIN) from the IRS. You will also need to file Form 1023 for federal tax exemption and STAX-1 with the Illinois Department of Revenue for state tax exemption.
Step 7: Ongoing Compliance
Regular filings and reports are necessary to maintain your not-for-profit status. Ensure that you meet all state and federal reporting requirements to avoid any legal pitfalls. For example, organizations incorporated in Illinois (or qualified to conduct business in Illinois) must file an Annual Report with the Illinois Secretary of State before the first day of the organization’s anniversary month each year.
Pitfalls to Avoid with Experienced Business Law Attorney Assistance
- Improperly Drafted Documents: Incorrectly drafted Articles of Incorporation or bylaws can cause severe issues down the line. An experienced attorney can help avoid this.
- Failure to Understand Regulations: Not-for-profit entities must adhere to specific state and federal regulations. A lack of understanding can result in penalties or loss of tax-exempt status.
- Mismanagement of Funds: In Illinois, a not-for-profit organization is subject to specific rules regarding funds management. Failing to follow these can be detrimental to your mission.
- Non-compliance With Ongoing Requirements: Failing to maintain accurate records or to file necessary annual reports can result in losing your not-for-profit status.
- Ineffective Governance: Governance issues often arise when there are poorly defined roles and responsibilities. An attorney can help you draft clear bylaws to prevent this issue.
