Steps in Organizing a Not-for-Profit Corporation

1. 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 which would also qualify for federal tax exemption. On the other hand, a neighborhood homeownersÕ association is also not-for-profit but would not qualify for a tax break. Only certain kinds of not-for-profit organizations--charities, schools, churches, clubs, etc.--fall into the tax exempt category. In general, this packet is geared toward those not-for-profit organizations which 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 may apply for tax exempt status (using Form 1023 or 1024) before incorporating. However, you must be incorporated before the IRS will consider the application. Therefore, you will want to draft the Articles of Incorporation with the IRS regulations in mind.

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.

2. 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:

  a. 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.
     
  b. 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.
     
  c. Duration
    You must include the time you plan to be incorporated. The duration is presumed to be perpetual, unless otherwise stated.
     
  d. 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:
     
    1. To promote, encourage, or foster any athletic, charitable, benevolent, or eleemosynary purpose or activity;
       
    2. To administer and operate property owned on a condominium basis;
       
    3. To promote or encourage or foster any civic, patriotic, or political purpose or activity;
       
    4. To promote or encourage any educational, research, or scientific purpose or activity;
       
    5. To form any professional, commercial, trade, or industrial association;
       
    6. To promote, encourage, or foster any religious, social, or literary purpose or activity;
       
    7. To promote or encourage any agricultural or horticultural purpose or activity;
       
    8. To encourage and foster soil, crop, livestock, and poultry improvements;
       
    9. To promote the development, establishment, and expansion of industries;
       
    10. To provide electrification on a cooperative basis;
       
    11. To provide telephone service on a mutual or cooperative basis;
       
    12. To own and operate water supply facilities for drinking and general use on a mutual or cooperative basis;
       
    13. To own residential property on a cooperative basis;
       
    14. 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;
       
    15. To administer and operate property owned on a condominium basis or by a homeowner’s association.
       
    After confining 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 which may imply a for-profit purpose.
       
  e. Tax-Exempt Status
    If you plan to apply for tax-exempt status, you must elaborate on the purpose you set forth in the section for “Other Provisions.” 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.
       
  f. Directors
    You must have at least three directors. 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.
       
  g. 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.
       
  h. 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. That statement must conform to the specifications of the Code, particularly section 501(c)(3). In certain cases, this information may be included in your bylaws.
       
    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.

3. 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 which relies more heavily on its members in making decisions. A non-member corporation relies heavily 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 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.

Note: Attached is an example of bylaws for a non-member corporation.

4. Register with the Secretary of State

Deliver two copies of the Articles of Incorporation and $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.

5. After Incorporating

  a. One-Time-Only Duties
     
    1. Register with the Recorder of Deeds: You must file a copy of the articles of incorporation with the Office of the Recorder of Deeds of the county in which the registered office of the corporation is located. This recording must be within 15 days after the Secretary of State has mailed these items, or as soon as possible thereafter.
       
    2. Federal Employer I.D. Number: Even if your corporation will not be tax-exempt, you should apply for your Federal Employer Identification Number. Almost all corporations will need this number at some point. Form SS-4 from the IRS is the correct form to use.
       
    3. 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.
       
    4. Inquire within the Post Office about charitable bulk mailing rates.
       
  b. Annual/Continual Obligations
    These are duties which 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. Federal Income Tax: To apply for federal income tax exemption, obtain Form 1023 or 1024 from the IRS. Complete and submit the application with copies of the certificate, Articles of Incorporation, and bylaws. The IRS will contact you regarding their 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. Otherwise, your organization will need to file a return each year. Note that 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 3 to 9 months to receive IRS approval. It is very common for the IRS to impose some further requirements and request changes in the bylaws or other operating documents before actually granting tax-exempt status.
       
    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. 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 organization of the corporation changes.
       
    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. Other Reports to Agencies: Depending on your tax-exempt status, the IRS, Department of Revenue, Attorney General, or local government may require various annual returns. The IRS may require annual forms to be filed, even if an organization has tax-exempt status. 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 of Incorporation 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 some sort of 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.
       
    10. Indemnification: The corporation in its 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 subjected to liability on behalf of the corporation.
       
    Please Note: This is not necessarily an all-encompassing list. Please contact competent counsel to ensure that your organization is abiding by all applicable laws and requirements.

Addresses and Phone Numbers

Secretary of State

Secretary of State
Corporation Department
Centennial Building
Third Floor
Springfield, IL 62756
217-782-7880

Department of Revenue

State of Illinois
Department of Revenue
Income Tax Division
P.O. Box 3545
Springfield, IL 62708
1-800-641-2150

State of Illinois
Department of Revenue
Sales Tax Division
101 West Jefferson
Springfield, Illinois 62708
1-800-641-2150

Attorney General

Illinois Attorney General
Charitable Trust Bureau
100 W. Randolph St., 3rd Floor
Chicago, IL 60601
312-814-2595
TTY: 312-814-3374

Internal Revenue Service (form pick-up only)

Internal Revenue Service
320 West Washington
Room 611
Springfield, IL 62703
217-789-4220

All places in Illinois not listed above, call: 1-800-252-2921

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