Springfield Business Journal Articles


Forming A Not-For-Profit

Do you see a need in the community and want to help? Do you want to get actively involved in helping people? If there is not organization in the area that provides the type of help you want to see, you may consider forming your own not-for-profit. But how do you go about it?

There are two main components to forming a not-for-profit. The first is actually forming the entity. A not-for-profit can be run as a corporation, a trust, or an unincorporated association. Generally, the best entity to use is a corporation.

A not-for-profit corporation is formed though the office of the Secretary of State. Articles of Incorporation are filed as with a for profit corporation. (The State does lower its fees, however, for not-for-profit corporations. The fee for filing articles of incorporation for a not-for-profit corporation is $50, while the fee for filing articles of incorporation for a for profit corporation is $150.) As with a for profit corporation, the not-for-profit’s name cannot be too similar to another entity in Illinois. In addition, unless it is clear from the name of the corporation that the entity is a not-for-profit, the name must include “NFP” at the end.

You must state the purpose of the not-for-profit in the articles of incorporation. Unlike a for profit corporation where the purpose can be as broad as “The transaction of any or all lawful businesses for which corporations may be incorporated under the Illinois Business Corporation Act,” the purpose of a not-for-profit must be much more specific. Purposes that qualify for a not-for-profit include charitable, educational, civic and religious. A list of possible purposes and a great deal more information in forming not-for-profit corporations can be found in the Illinois Secretary of State’s publication “A guide for Organizing Nor-For-Profit Corporations,” which can be found on the Secretary’s website.

The articles of incorporation must include the names and addresses of the members of the board of directors. Unlike a for profit corporation which can have only one director, a not-for-profit must have at least three members of its board of directors. The articles of incorporation must also include the name and address of the “registered agent” of the corporation. This is the person and the address to which the Secretary of State will send all notices and also the person and address to be used by anyone suing the corporation.

Instead of stockholders, a not-for-profit corporation has “members.” The members do not own the not-for-profit, but they control it by electing the board of directors. Illinois law provides that a not-for-profit can choose not to have members. If the not-for-profit will not have members, then this fact must be stated in the articles of incorporation or the bylaws.

The not-for-profit corporation must also have bylaws. This document will be more complicated than the articles of incorporation because it will set forth the operation of the organization. The bylaws will include how the members, if any, are determined, how the board of directors is elected, who the officers are, and how the corporation will serve its charitable purpose.

Once the state requirements have been met, the IRS requirements must be met if the corporation is to be tax-exempt. A not-for-profit corporation is not automatically tax exempt. The IRS must issue that determination.

First, the corporation needs a tax identification number (EIN). This is true whether or not the corporation is applying for tax-exempt status. Second, the corporation must file an application with the IRS. There are two types of applications, Form 1023 and Form 1024.

Form 1023 is used by tax-exempt organizations that qualify under Section 501(c)(3) of the Internal Revenue Code. These include entities organized for religious, charitable, scientific or educational purposes, testing for public safety, fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities) or the prevention of cruelty to children or animals. The IRS gives the following examples of these types of organizations: nonprofit old-age homes, parent-teacher associations, charitable hospitals or other charitable organizations, alumni associations, schools, chapters of the Red Cross, boys’ or girls’ clubs and churches. There are different schedules of the Form 1023 to be filed by different types of organizations, such as hospitals or schools.

Form 1024 is used by organizations that qualify for tax-exempt status under Section 501(a) of the Code. Examples of these organizations include civic leagues, business leagues such as chambers of commerce, social clubs and cemeteries.

Applications for tax-exempt status require a great deal of information, including income statements of the organization for three years. If the organization is new, it must include projected income statements. The compensation of the directors and officers must be listed, as well as the compensation of employees who are paid over $50,000. You must also disclose if any of these people are related.

The IRS has additional requirements for the corporation’s bylaws and articles of organization. For example, the documents must provide that upon dissolution of the corporation, all remaining assets must be used exclusively for exempt purposes, such as charitable, religious, educational, and/or scientific purposes. For more information see IRS Publication 557, “Tax Exempt Status for Your Organization” available at www.irs.gov.

Even if tax-exempt status is granted to your organization, certain income will not be tax-exempt. This income is called unrelated business taxable income or UBTI. An example of UBTI is the operation of a pharmacy that is open to the public by a not-for-profit hospital. For more information, see IRS Publication 558, “Tax on Unrelated Business Income of Exempt Organizations.”

Finally, charities also have filing requirements with the State of Illinois Attorney General’s Office. Information on these requirements can be found on the Attorney General’s website.

In conclusion, take great care when forming a charitable organization. There are many pitfalls along the way, and you would be wise to consult with professionals.

by Sarah Delano Pavlik
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