Administrative Read Reference

Charitable Giving

Steps in Organizing a Not-for-Profit Corporation

Attachments and files for download

NOTE: This is a checklist for those libraries considering operating their own 501(c)(3) corporation. It is recommended that rather than establish a separate 501(c)(3) for your library which requires oversight and management, libraries should take advantage of the Illinois Library Association's Fund for Illinois Libraries for charitable contributions.

Preliminary Considerations

Before proceeding to organize a not-for-profit corporation, it is essential that you decide whether you wish to apply for federal income tax exemption. Not all not-for-profit organizations qualify for a tax exemption. For instance, the American Heart Association is a not-for-profit corporation that also qualifies for federal tax exemption. On the other hand, a neighborhood homeowners’ association is also a not-for-profit organization but does not qualify for all tax exemptions. Only certain kinds of not-for-profit organizations—charities, schools, churches, etc., fall into the tax exempt category. In general, this section is geared toward those not-for-profit organizations that also qualify as tax-exempt organizations.

To find out if your organization will qualify, obtain IRS Publication 557, entitled "How to Apply for and Retain Tax Exempt Status for Your Corporation." You will want to draft the Articles of Incorporation with the IRS regulations in mind. In 2014, the IRS greatly simplified this process (and somewhat reduced the filing fees as well) for the smaller not-for-profits, (i.e. under $50,000 in receipts, and under $250,000 in assets), thus reducing substantially, if you can meet the size levels of donations and fundraising of these new rules and forms.

Before actually commencing the process of organizing a not-for-profit corporation, we strongly urge you to consult both an accountant and an attorney as there are many intricacies in the process and a number of obligations in maintaining such an organization. This will ensure that no details are overlooked.

Drafting the Articles of Incorporation

This is the legal document by which a corporation is formed. Two identical copies of Form NP-102.10 must be submitted. Some of the more important components of the Articles of Incorporation are as follows:

  1. Corporate Name:
    Any name may be used, so long as it is distinguishable from any other Illinois corporation.  Be careful that the name does not indicate that your cooperation is doing business for a profit.  You may find out if a name is available by writing or calling the Secretary of State.  Names may be reserved for a period of up to 90 days.
  2. Registered Agent and Office:
    The purpose of appointing an agent is to provide an individual upon whom service of process may be made and also a person to whom correspondence from the Secretary of State can be sent.  This entity must be either a natural person and a resident of Illinois or a corporation with a purpose clause permitting it to be an agent for other corporations, with an office in Illinois. 
  3. Duration:
    You must include the time you plan to be incorporated.  The duration is presumed to be perpetual, unless otherwise stated.
  4. Purpose:
    This is a statement of the function or character of the corporation.  This statement must be a narrow and specific purpose.  It cannot be general or vague.  Purposes should be confined to one or more of the following similar purposes:
    • To promote, encourage, or foster any athletic, charitable, benevolent, or charitable purpose or activity.
    • To administer and operate property owned on a condominium basis.
    • To promote or encourage or foster any civic, patriotic, or political purpose or activity.
    • To promote or encourage any educational, research, or scientific purpose or activity.
    • To form any professional, commercial, trade, or industrial association.
    • To promote, encourage, or foster any religious, social, or literary purpose or activity.
    • To promote or encourage any agricultural or horticultural purpose or activity.
    • To encourage and foster soil, crop, livestock, and poultry improvements.
    • To promote the development, establishment, and expansion of industries.
    • To provide electrification on a cooperative basis.
    • To provide telephone service on a mutual or cooperative basis.
    • To own and operate water supply facilities for drinking and general use on a mutual or cooperative basis.
    • To own residential property on a cooperative basis
    • To administer and operate an organization on a cooperative basis producing or furnishing goods, services, or facilities primarily for the benefit of its members who are consumers of such goods, services, or facilities
    • To administer and operate property owned on a condominium basis or by a homeowners' association.

After defining the purpose, you should then give a more specific and detailed purpose. For example, "To send needy children to summer camp" will suffice. Again, do not state any purpose that may imply a for-profit purpose.

  1. Tax-exempt status:
    If you plan to apply for tax-exempt status, you must elaborate your purpose in the “Other Provisions” section below. The purpose must be tied into the tax-exempt activity. Remember, not all not-for-profit corporations are tax-exempt. Thus, your purpose should show both a not-for-profit purpose as well as a purpose that will qualify it for tax-exempt status.
  2. Directors:
    You must have at least three directors. You may specify a range of up to 5 (e.g. 3 to 8). You may impose any qualifications you choose, and these restrictions may be set forth in the “Other Provisions” section or you may set them forth in the bylaws.
  3. Incorporators:
    One or more incorporators may organize a corporation. An incorporator may be either a natural person 18 years or older or a corporation, domestic or foreign, whether not-for-profit or otherwise.
  4. Other Provisions:
    Here you may list provisions regarding the internal affairs of the corporation. These may include:
    1. Tax-exempt Status: If you will be applying for tax-exempt status and the Internal Revenue Code under which your corporation falls requires an elaboration of purposes, you should make those statements here. These statements must conform to the specifications of the Code, particularly section 501(c)(3).
    2. Corporate Officers:  You may also impose restrictions or qualifications on who can be an officer of the corporation. This can also be done in the bylaws.
    3. Other Regulations:  You may list any other regulation for the governing of the internal affairs of the corporation. Again, this can also be left for the bylaws.

Prepare the Bylaws

The Bylaws set forth the details of how the corporation will operate, including qualification of officers, annual meetings, board of directors, fiscal year, elections, etc. If information regarding tax-exempt status, officer qualifications, or other regulations were not included in the Articles of Incorporation, you will want to be sure to include them here.

An important issue in setting up the operation of the corporation is whether the organization will be a member or non-member corporation. A member corporation is one that relies more heavily on its members in making decisions. A non-member corporation relies on a Board of Directors to make decisions. For instance, a member corporation may come together once a year to vote on important issues. A non-member corporation would rely on an elected Board to do perform these duties. Whether a corporation is member or non-member will depend on the size and nature of the organization. Non-member corporations are much more common, as they often allow for more efficient decision making and operation.

The following section includes an example of bylaws for a non-member corporation and a separate example of bylaws for a member corporation.

Register with the Secretary of State

Deliver two copies of the Articles of Incorporation with the required filing fee (currently $50) in the form of a certified check, cashier’s check, or money order, to the Secretary of State. When approved, the Secretary of State will stamp the date of filing on both copies and return one copy, with the Certificate of Incorporation, to the incorporators or their representative.

After Incorporating

  1. One-Time-Only Duties
    1. Federal Employer Identification Number: Whether or not your corporation will be tax-exempt, you should apply for a Federal Employer Identification Number. Almost all corporations will need this number at some point. IRS Form SS-4 is the correct form to use. Online application is available.
    2. Register with the Illinois Attorney General: Almost all charitable organizations must register with the Attorney General, Division of Charitable Trust and Solicitations. Information and forms should be obtained from the office of the Illinois Attorney General.
    3. Inquire within the Post Office about charitable bulk-mailing rates.
    4. Illinois Sales Tax: Some organizations qualify for an exemption from paying sales tax on goods bought for use of the organization if they are formed for charitable, religious, or educational purposes. To find out if you qualify, write a letter of request to the Illinois Department of Revenue, Sales Tax Division, and enclose copies of the Articles of Incorporation, bylaws or constitution, IRS exemption letters, or other helpful documents. If you qualify, you will be issued a letter ruling and will not need to address this issue again unless the activities of the organization change.
    5. e. Apply for Tax-Exempt Status: To apply for federal income tax exemption, obtain Form 1023 (or, if eligible for the small not-for-profit simplified application process, Form 1023 EZ). Complete and submit the form, copies of the Certificate of Incorporation, the Articles of Incorporation, bylaws, and the documents listed in the IRS Form 1023 instructions (for the Form 1023 EZ simplified process, see those instructions for any supporting documents). Currently all submissions must be made online.
  2. Annual/Continual Obligations
    These are duties that must be performed on an annual or continual basis, as applicable. We generally recommend a calendar year for the corporation so that it can be set up to ensure that these duties are performed at the same time each year. This ensures that they are not overlooked.
    1. Annual IRS filings: The IRS will contact you regarding its decision and inform you of any annual reports that will be required in the future. You only need to apply for tax-exempt status once. Although an organization may be tax exempt, it is not exempt from filing other annual IRS forms, even if it is only a small charity.

      This part of the process is somewhat complicated, depending on the size of the organization. It generally takes 6 to 9 months to receive IRS approval (though the small not-for-profit process by 1023 EZ is supposed to reduce these delays). It is not uncommon for the IRS to impose some further requirements and request changes in the bylaws or other operating documents before actually granting tax-exempt status. If you apply within 17 months of incorporation, an IRS approval will be retroactive to the date of incorporation.
    2. Illinois Income Tax: If your corporation receives federal tax exemption, it is automatically exempt from Illinois income tax. No reports need be filed. Otherwise, your organization will need to file an Illinois income tax return each year.
    3. Indemnification: The corporation bylaws should agree to indemnify its officers, directors, employees, and agents to protect them from personal liability. You should obtain indemnification for costs, attorneys’ fees, and judgment or settlement. It is important that the individuals working for a corporation are not subject to liability on behalf of the corporation.
    4. Employee Issues: If the corporation pays salaries to employees, it will be required to file an employer’s quarterly return, withhold taxes, etc. The organization may also be subject to acquiring unemployment insurance for employees.
    5. Annual Reports to the Secretary of State: All not-for-profit corporations must file an annual report of officers and directors with the Secretary of State. The report will be due before the first day of the month in which the corporation was originally formed. Forms will be sent to the registered agent approximately 60 days before the due date.
    6. Annual Reports to the Illinois Attorney General: Depending on your tax-exempt status, the Illinois Attorney General may require annual returns, including for charitable solicitations. Whether you must file these reports and which reports you must file depends in part on your status as a tax-exempt organization. Consult an attorney to be sure of your reporting obligations.
    7. Other Reports to the Secretary of State: Any changes to the corporate structure affecting the Articles of Incorporation, including a change in the corporate name, duration, or purpose, will require that the articles be amended. All forms for these items are available from the Secretary of State and should be filed upon the occurrence of the particular event.
    8. Accounting Systems and Controls: It is vital that the organization establish an accounting system. A reliable accounting system allows you to retrieve information quickly and consistently to use in complying with annual reporting requirements. One of the most common problems for charitable organizations is that they are sometimes too informal in managing financial procedures. It is recommended that there be a system installed so that all checks drawn on the corporation have a dual signature requirement. We urge you to consult an accountant in order to arrive at the type of system which will be most efficient to your organization.
    9. Insurance Coverage: You should inquire whether you need insurance coverage such as D & O coverage, general liability coverage, and coverage for equipment and premises.

Note: This is not necessarily an all-encompassing list. Please contact legal counsel to ensure that your organization is abiding by all applicable laws and requirements.

Attachments:

Some of the resources listed below are available in PDF (Portable Document Format), which may be viewed or printed using your browser and Adobe Reader. Macintosh and Windows versions of Adobe Reader may be downloaded free from Adobe. Get Adobe Reader.

  1. List of addresses and phone numbers that you may need in organizing a not-for-profit corporation.
  2. Some of the forms needed in the organization process and an example of non-member corporate by-laws