Most nonprofits are 501(c)(3) corporations, which means they are formed for religious, charitable, scientific, literary, or educational purposes and are eligible for federal and state tax exemptions. To create a 501(c)(3) tax-exempt organization, first you need to form an Illinois not-for-profit corporation. Then you apply for tax-exempt status from the IRS. Here are the details.
Form Your Illinois Not-For-Profit Corporation
1. Choose who will be on the initial board of directors.
In Illinois, your nonprofit corporation must have three or more directors. You must have at least one incorporator and the incorporator can be an individual (age 18 or older) or a corporation (domestic or foreign).
2. Choose a name for your corporation.
The name of your not-for-profit corporation must be distinguishable from the name of any business entity on file with the Illinois Secretary of State. To see if your proposed name is available, you can search Illinois's corporate name database on the Illinois Secretary of State's website. You can also write or call the Secretary of Stateʼs office in Springfield to find out if a name is available.
Although not required, the name may contain the words "corporation," "incorporated," "company," "limited," or an abbreviation of one of those. The name must end with the letters "NFP" if the corporate name contains any word or phrase that indicates or implies that the corporation is organized for any purpose other than a purpose authorized under the Illinois General Not For Profit Corporation Act. The name may not contain the words “regular democrat,” “regular democratic,”“regular republican,” “democrat,” “democratic,” “republican,”or the name of any other established political party, unless consent is given by the State Central Committee of the established political party.
3. Prepare and file your not-for-profit articles of incorporation.
You will need to create and file not-for-profit articles of incorporation with the Illinois Secretary of State's office. The articles of incorporation must include basic information about your corporation including:
- your corporation's purpose (as authorized under Section 103.05 of the Illinois Not For Profit Act)
- the address of the corporation's initial registered office in Illinois and the name of the initial registered agent at that office
- the name and address of each incorporator, and
- the name and address of each initial director.
The Illinois Secretary of State has a fillinable not-for-profit articles of incorporation form on its website which you can use to form your not-for-profit Illinois corporation. Complete and file your articles following the instructions provided on the Secretary of State's website (adding the IRS-required language discussed below). Do not use the online articles filing option unless it allows you to include provisions required for tax exemption. (At the time this article was published, this was not allowed.)
The fillinable articles form on the Secretary of State’s website does not include certain provisions required by the IRS to obtain tax-exempt status. To receive 501(c)(3) tax-exempt status from the IRS, you'll need to add certain additional language to your articles, including:
- a statement of purpose that meets IRS requirements
- statements that your nonprofit will not engage in prohibited political or legislative activity, and
- a dissolution of assets provision dedicating your assets to another 501(c)(3) organization upon dissolution.
For information on IRS requirements for tax exemption including sample required language, see IRS Publication 557, Tax-Exempt Status for Your Organization, available on the IRS website. Be sure to include the tax-exempt required language in the articles you prepare. For more information on preparing your Illinois not-for-profit articles, see A Guide for Organizing Not-for Profit Corporations, available on the Illinois Secretary of State's website.
4. Prepare bylaws for your Illinois nonprofit corporation
You'll need to prepare bylaws that comply with Illinois law and contain the rules and procedures your corporation will follow for holding meetings, electing officers and directors, and taking care of other corporate formalities required in Illinois. Your bylaws do not need to be filed with the Illinois Secretary of State -- they are your internal operating manual. For sample bylaws and help creating your bylaws, see How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).
5. Hold a meeting of your board of directors
Your first board meeting is usually referred to as the organizational meeting of the board. The board should take such actions as:
- approving the bylaws
- appointing officers
- setting an accounting period and tax year, and
- approving initial transactions of the corporation, such as the opening of a corporate bank account.
After the meeting is completed, minutes of the meeting should be created.
6. Set up a corporate records binder.
You should set up a corporate records binder for your nonprofit to hold important documents such as articles of incorporation, bylaws, and minutes of meetings. For more information, as well as minutes forms, consent forms, and other resolutions, see Nonprofit Meetings, Minutes & Records, by Anthony Mancuso (Nolo).
Obtain Your Federal and State Tax Exemptions
Now that you have created your nonprofit corporation, you can obtain your federal IRS and Illinois state tax exemptions. Here are the steps you must take to obtain your tax-exempt status:
1. File your Form 1023 federal tax exemption application.
To obtain federal tax-exempt status from the IRS, you will need to complete and file IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This long and detailed form asks for lots of information about your organization, including its history, finances, organizational structure, governance policies, operations, activities, and more. For line-by-line instructions on how to complete the Form 1023, see How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).
Smaller nonprofits may be eligible to file Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. This is a much simpler, shorter form that is filed online. Only smaller nonprofits--those with projected annual gross receipts of less than $50,000 and total assets of less than $250,000--are eligible to use the streamlined 1023-EZ application.
See the IRS website for more information on the Form 1023 and Form 1023-EZ filing requirements.
2. Obtain your Illinois state tax exemption.
If your nonprofit receives a federal tax exemption from the IRS, it is exempt from Illinois income tax. You do not need to file any documents to obtain the exemption. Some not-for-profit corporations may qualify for an exemption from state sales tax. Check the Illinois Department of Revenue website regarding what forms and documents you need to file to apply for a sales tax and other state tax exemptions.
3. Other state reporting and registration requirements.
Depending on your activities and the size of your organization, you may need to register with the Illinois Attorney General before doing any fundraising activities. Check the Illinois Attorney General's website for rules and information about fundraising registration requirements.