Forming a 501(c)(3) Nonprofit Corporation in Illinois

If you’re passionate about making a difference, starting a nonprofit might be the perfect way to turn your ideas into reality. A 501(c)(3) nonprofit corporation is a legal entity recognized by the IRS as tax-exempt, which means it doesn’t have to pay federal income taxes on the money it raises.

The term “501(c)(3)” comes from the section of the U.S. Internal Revenue Code that provides tax-exempt status to eligible nonprofit organizations. These organizations must exist for specific purposes, such as charitable, religious, educational, scientific, or literary efforts.

Prior To Filing your 501(c)(3) Nonprofit Corporation

Just like with any business entity, one of the first decisions you need to make is the name. The name should be distinguishable from any other business in Illinois.

Also crucial is determining who will be on the initial board of directors for your business. There is no upper limit to how many directors you can have, but in Illinois you must have at least three. You will need to identify all your directors when filing for your business.

It is important to note, while it is not prohibited for board members to receive compensation for their services, it is fairly uncommon. Moreover, compensation for board members is scrutinized highly by the IRS and if it is deemed to high, it can lead to a myriad of issues. Therefore, it is advisable that board members not be compensated and avoid potential issues all together.

Filing the Articles of Incorporation

The next step is drafting and filing your articles of incorporation with the state of Illinois State’s Department of Business Services. The articles of incorporation are legal documents that formally create your nonprofit as a corporation in the eyes of the state.

In addition to the name of the corporation and the directors, you will need to include a statement pertaining to the purpose of the business. This statement requires some specificity and lays out the actual goal of your nonprofit.

You will also need to include language required by the IRS for federal tax-exempt status. These statements include one that expressly lays out the nonprofit nature of the business as well as one that describes how the assets of the nonprofit are distributed upon dissolution. The IRS has recommended language that can be found here.

Drafting Bylaws for Your 501(c)(3) Nonprofit Corporation

In addition to the articles of incorporation, you will also need to draft bylaws for your nonprofit. The bylaws are the governing document of the business and they lay out the rules and procedures that control how your nonprofit functions. These should cover essential topics such as:

• The structure of the board of directors and how they will be elected.
• How meetings will be held and decisions made.
• The roles of officers, such as president, secretary, and treasurer.
• How finances will be managed.

In Illinois, bylaws are not filed with the state but are essential for internal governance and for applying for tax-exempt status with the IRS. They ensure that everyone in the organization is clear on the rules and procedures for running the nonprofit.

Applying for an EIN

An Employer Identification Number (EIN) is a unique number assigned to your nonprofit by the IRS, similar to a Social Security number for an individual. You will need an EIN to open a bank account, file taxes, and hire employees.

Apply for 501(c)(3) Status with the IRS

Now comes one of the most important steps—applying for federal tax-exempt status. To do this, you must complete IRS Form 1023 or Form 1023-EZ, depending on the size of your organization.
Form 1023 is the long version and is used for larger organizations or those with more complex structures.
Form 1023-EZ is a streamlined version for smaller nonprofits with projected gross receipts under $50,000 and total assets under $250,000.
It’s important to be thorough and accurate in your application, as errors or missing information can delay the approval process.
Once approved, your nonprofit will receive a letter of determination from the IRS, officially granting your 501(c)(3) status.

Illinois-Specific Requirements

In addition to federal requirements, Illinois has its own set of rules for nonprofits. Some key steps include:

• Register with the Illinois Attorney General: If your nonprofit intends to solicit charitable donations, you must register with the Charitable Trust Bureau of the Illinois Attorney General’s office. This process involves filing the appropriate forms and paying fees.
• Annual Report: Illinois nonprofits must file an annual report with the Illinois Secretary of State. This report provides updated information on the nonprofit’s leadership and activities.
• Sales Tax Exemption: Once your nonprofit has received 501(c)(3) status from the IRS, you can apply for sales tax exemption with the Illinois Department of Revenue. This allows your nonprofit to avoid paying state sales tax on purchases related to its mission.

Remember to Stay Compliant

Once your nonprofit is up and running, it’s critical to maintain compliance with both federal and state regulations. This includes:

• Filing annual tax returns (even if you don’t owe taxes).
• Keeping your board of directors active and engaged.
• Following your bylaws and holding regular meetings.
• In Illinois, nonprofits must file annual reports with the Secretary of State and renew their charitable registration with the Attorney General’s office.