Forming a Charitable Organization in Illinois

Posted almost 5 years ago. Applies to Illinois, 4 helpful votes

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1

What Type of Entity?

The first step to organizing any business - including not-for-profits - is to select an appropriate business entity. Under modern Illinois law, a charitable organization can take a variety of forms. The two most common are the not-for-profit corporation and the unincorporated association. The not-for-profit corporation ("NFP") is a formal business entity that is formed by filing the required forms and fees with the Illinois Secretary of State. The NFP corporation can be arranged in a variety of ways and can issue membership interests if it chooses. Although operation of a NFP is similar to a business corporation, the difference is that a NFP cannot distribute profits to its members. The unincorporated association ("UA") is much like a club or fraternity. It is a group of people organized for a common purpose. Historically, the UA did not have a legal identity of its own apart from its members. However, modern statutes now allow UAs to hold property and enter contracts.

2

Filing the Necessary Business Papers

A NFP corporation is created by filing special Articles of Incorporation with the Illinois Secretary of State. The form can be obtained from www.cyberdriveillinois.com and the current fee is $50.00. It is advisable (because of the charitable nature of the NFP) to consult with an attorney to discuss the structure of the NFP and draft special provisions for the Articles of Incorporation. It is easier to create an appropriate set of Articles in the beginning as opposed to changing them after the NFP has started operations. Note: Illinois law requires corporations (including NFPs) to file their Articles of Incorporation with the county recorder of deeds where the registered agent is located. It is prudent to also file them in the county where the primary office is located, if different. Don't forget this important step! It must be done within 15 days of corporate formation. An UA does not have to file with the State, but it may have to register for a "dba" permission locally.

3

Drafting and Filing the Necessary Tax Papers

Both NFPs and UAs must file requests for exemption from the Internal Revenue Service and make similar filings at the Illinois Department of Revenue. The IRS requires a completed Form 1023 and attachments as necessary. It is incredibly important to read the instructions to Form 1023 and make sure all of your organizational papers (articles of Incorporation, bylaws, conflicts resolution, etc.) comply with the IRS's requirements. If they don't, your application may be delayed or suspended. Consulting an accountant or attorney familiar with NFPs and charities would be advisable at this point if you are unsure of what to do. Once you complete Form 1023, it and the $350 filing fee ($700 if the charities finances exceed the $350 fee level as explained in the Form 1023 Instructions) should be sent to the applicable address on the form. The process of exemption may take several months, and you may be requested to clarify or submit additional information by request.

4

Getting Permissions from the Attorney General

One step many new charities forget to take is to submit the proper forms and information to the Illinois Attorney General ("AG") to get permission to solicit donations within the state. The AG is given statutory authority to regulate charities to protect Illinois citizens from unscrupulous solicitors. The AG requires information on one or more forms depending on the type of charity that is registering. The current filing fee is $15. The process may take several months, but if a quicker review is needed then a phone call to the Chicago office of the AG can sometimes be helpful. Once the application is accepted and filed, the charity becomes an "Illinois Registered Charity" and is searchable on the Illinois Attorney General's charity database. Once again, do not forget this important step. Any charity that does not comply with the AG's requirements may be subject to fines and even criminal prosecution.

5

Organizational Meetings and First Steps

The final step before the charity can get down to business is an organizational meeting of the board of directors (or similar leaders in an UA). The Illinois NFP corporation statute lists several items of business that must be accomplished, and is beyond the scope of this Legal Guide. However, it is important to ratify (1) officers at the meeting that will serve the NFP or UA until the next formal meeting, (2) the organization's conflict of interest policy as required by the IRS and Illinois AG, (3) the appointment of a registered agent for the organization, (4) the corporate bylaws or UA constitution, and (5) train the directors and leadership on what Illinois and federal law requires of them. It is advisable that a qualified attorney attend the meeting to explain how federal and Illinois law applies to directors. Although Illinois provides some protection from personal liability, the best course would be to properly train directors and officers to avoid problems.

6

Good Luck!

After the charity is organized, tax-exemption is approved, and the AG registers the organization, the charity may begin operations and serve its community. NFPs (and to a limited extent UAs) must comply with annual formalities to keep in good standing with the Secretary of State and the IRS. The Secretary of State requires corporate formalities (like an annual director's meeting and minutes) be kept and an annual report be submitted each anniversary month with the required fee. The IRS requires Form 990 to be filed for all exempt organizations yearly, and in some cases (if the charity has income unrelated to its exempt purpose) the charity must file and pay regular income taxes with the IRS and the Illinois Department of Revenue. Good luck!

Additional Resources

For more information, several publications published by the American Bar Association may be helpful (especially for the legal duties and liabilities of NFP corporate directors). The ABA's website can be found at www.abanet.org. Additionally, not-for-profit advice can be found from lawyers around the state. the author suggests consulting the Illinois State Bar Association for a referral if needed: www.illinoislawyerfinder.com.

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