Thinking About Starting a Non-Profit in Illinois?

A nonprofit organization is an organization that uses its surplus revenues to further achieve its purpose or mission, rather than distributing its surplus to owners. The most common examples of nonprofit organizations are churches and schools. One of the most appealing qualities of a nonprofit organization is the possible tax benefit. Illinois-approved non-profits are exempt from paying state income taxes in Illinois. Non-profits must apply for, and receive, an additional exemption from the state sales and property tax. With regard to the federal income tax exemption, the entity needs to apply to be qualified as a 501(c)(3) organization. 

In order to be approved as an Illinois non-profit, the nonprofit organization has to meet a “high” standard set forth by the state. First, Illinois requires a nonprofit organization to have at least three directors. The directors together will control the direction of the organization. Furthermore, a nonprofit organization has to maintain minimum company formalities to protect its directors from liabilities and maintain its tax-exempt status. As required of most business entities, the nonprofit organization is prohibited from commingling company and personal funds. The directors of the non-profit organization must meet at least once a year. The organization must maintain records of meetings by the directors. Maintaining corporate formalities helps protect the directors of the nonprofit organization from personal liability for the obligations of the organization. However, there are few exceptions to this protection from liability: the directors could be liable when he or she personally and directly injures someone, guarantees a bank loan or debt, fails to ensure the organization deposits taxes or files necessary tax returns, or intentionally, fraudulently, or illegally causes harm. More importantly, the directors and employees of a nonprofit organization can only make “reasonable” salaries or they may jeopardize the organization’s tax-exempt status.  Lastly, no “dividends” like those issued by for-profit corporations, can be issued by nonprofit organizations.

Due to all the requirements and paperwork, running a nonprofit organization is unlikely to be a part-time job. A startup and small organization may want to evaluate the worthiness of the tax benefit given its comparatively strict corporate formality requirement.