The Law Offices of Bradford E. Block has organized and obtained tax-exempt status for a variety of not for profit organizations, including both public charities and private foundations.
We currently represent a number of tax exempt organizations including public charities and private foundations.
In order to obtain tax exempt status an organization must file IRS Form 1023 Application for Recognition of Exemption under Section 501(c) of the Internal Revenue Code. Our office has successfully prepared and filed numerous applications with the IRS for tax exempt status on behalf of our clients.
Organizing a Not-For-Profit Corporation in Illinois
- Key Provisions to Include. Articles of Incorporation
- Key Provisions to Include in Not-For-Profit Corporation Bylaws
- The Use of LLCs (and L3Cs) for Nonprofits
Key Provisions to Include. Articles of Incorporation
A not-for-profit corporation is formed in Illinois by the filing Articles of Incorporation with the Illinois Secretary of State. Two identical copies of the Articles of Incorporation, Form NP-102.10, must be submitted when organizing a not-for-profit corporation in Illinois. These articles set forth the name of the corporation, the length of its duration, the purposes for which it has been created and any accompanying provisions. In addition, the Articles of Incorporation also include the name of the registered agent, address of the registered office, the number and names and residential addresses of the Directors and the names of each incorporator.
Section 104.05 of the Illinois Act sets forth the guidelines which need to be followed when selecting a name for the corporation. One such guideline provides that any name can be chosen so long as it can be distinguished from an already existing corporation or limited liability company. The Secretary of State’s office can do a name check over the telephone should one want to verify the availability of a name. The name must also refrain from having any reference to an established political party (republican, democrat…etc.) unless that party has previously given consent. Unlike for-profit corporations, the name of a not-for-profit corporation need not but may contain the word “corporation”, “company”, “incorporated”, or “limited”, or an abbreviation of one of such words. Practitioners should review Section 104.05 of the Illinois Act for other name guidelines prior to preparing and filing Articles of Incorporation. In addition to the naming, the following are other key provisions that should be addressed when organizing a not-for-profit corporation.
3. Governing Body.
The governing body of a not-for-profit corporation is Board of Directors that manages the affairs of the corporation. The number of initial number of Directors is fixed by the Articles of Incorporation. Amendments should be made to the by-laws to increase or decrease the number of Directors. A minimum of three (3) Directors is required for a not-for-profit corporation. The names and the residential addresses of the initial Directors must be set forth in the Articles of Incorporation.
4. Purpose Clause.
The Articles of Incorporation must include the purpose(s) for which the corporation is organized. A broad, vague purpose will not be accepted; the purpose must be specific and narrow. Section 103.05 of the Illinois Act provides an extensive list of allowable purposes for tax exempt or not-for-profit corporations:
9. Social10. Literary
16. Soil Improvement
17. Crop Improvement
18. Livestock or poultry improvement19. Professional, Commercial, industrial or trade association
20. Promoting the development, establishment or expansion of industries
21. Electrification on a cooperative basis
22. Telephone service on a mutual or cooperative basis
23. Ownership and operation of water supply facilities for drinking and general domestic use on a mutual or cooperative basis
24. Ownership or administration of a residential property on a cooperative basis
25. Administration and operation of property owned on a condominium basis or by a homeowner association
26. Administration and operation of an organization on a cooperative basis producing or furnishing goods, services, or facilities primarily for the benefit of Members who are consumers of such goods, services, or facilities
27. Operation of a community mental health board or center organized pursuant to the “Community Mental Health Act” for the purpose of providing direct patient services
28. Provision of debt management services as authorized by the Debt Management Service Act
29. Promotion, operation and administration of a ridesharing arrangement as defined in Section 1-176.1 of the Illinois Vehicle Code
30. The Administration and operation of an organization for the purpose of assisting low-income consumers in the acquisition of utility and telephone services
The purpose may be prefaced with a more broad intention but should be followed by a detailed elaboration. Any indication of a business purpose should be avoided, as it is contradictory to the tax-exempt or not-for-profit corporation’s purposes. See also “6. Provisions Required by IRS”, below.
5. Dissolution Clauses.
The Illinois Act does not require that the Articles of Incorporation contain a provision regarding the dissolution of the corporation. However, the IRS requires that such a provision is contained in the Articles of Incorporation. Dissolution terminates the corporation’s existence and stops it from conducting further affairs except those necessary to disburse its remaining assets. A voluntary dissolution of a corporation must be authorized by a majority of the Directors. When this occurs, the corporation must follow the guidelines for dissolution as set up in the dissolution clauses of the Articles of Incorporation. Notice of the election to dissolve the corporation has to be provided to all Directors a minimum of three days prior to the execution of the Articles of Dissolution. If the corporation has Members, a notice of the dissolution meeting must be provided to all Members. At least two-thirds of Members must agree upon dissolution, unless the bylaws specify a smaller or larger vote requirement.
When the corporation is dissolved, the Board of Directors must first settle all the liabilities and any assets that require return, transfer of conveyance have to be returned, transferred or conveyed. Assets that were held for charitable, religious, eleemosynary, benevolent, educational or other similar purposes should be transferred or conveyed to a corporation, society or organization who partakes in substantially similar activities to those of the dissolving corporation. Any distributive rights of the Members to others as stated in the bylaws are to be followed. After all these assets are distributed, any remaining assets may be given to societies, organizations or corporations, whether for-profit or not-for-profit, as specified in Section 112.17 of the Illinois Act.
6. Provisions Required by IRS.
In order to be considered to tax-exempt status under Section 501(c)(3) of the Code, the Articles of Incorporation must include certain provisions. The IRS requires that the purposes set forth in the Articles of Incorporation be limited to those described in Section 501(c)(3) of the Code. Those purposes are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition and preventing cruelty to children or animals. The following provisions regarding dissolution should be included in the Articles of Incorporation for corporations seeking to qualify as a 501(c)(3) organization.
Upon the dissolution of the corporation, the Board of Directors shall, after paying or making provision for the payment of all liabilities of the corporation, dispose of all the remaining assets of the corporation exclusively for the purposes of the corporation in such a manner or to such organization or organizations as shall at the time qualify for exemption under the provisions of Section 501 (c) (3) of the Internal Revenue Code as now stated or as it may be hereafter amended.
No substantial part of the activities of the corporation shall be the carrying on of propaganda or otherwise attempting to influence legislation except as may be permitted to Section 501(c)(3) organizations of the Internal Revenue Code, and the corporation shall not participate in or intervene, including the publication or distribution of statements, in any political campaign on behalf of any candidate for public office.
Notwithstanding any other provisions of these Articles, the corporation shall not conduct or carry on activities not permitted to be conducted or carried on by an organization exempt under Section 501(c)(3) of the Internal Revenue Code as now stated, or as it may hereafter be amended, or by an organization contributions to which are deductible under Section 170(c)(2) of such Code as now stated or as it may be hereafter amended.
7. Other Crucial Language.
Additional provisions related to the internal affairs of the corporation can be added to Articles of Incorporation following the purpose clause. Restrictions and qualifications regarding Members, Officers, or Directors of the corporation along with the duties they must perform can be included in the Articles of Incorporation. These provisions not need to be included in the Articles of Incorporation; instead can be included in the by-laws.
A registered agent, who maintains contact with the Secretary of State, must be named in the Articles of Incorporation. This agent’s name and address appears under the corporations name and is to whom the Illinois Secretary of State sends the annual report each year as well as the person who receives service of process directed to the corporation. The agent must be a natural person and a resident of the state or a corporation within the state that permits it to be the agent for another corporation in its purpose.
The duration of a corporation is perpetual unless otherwise specified in the Articles of Incorporation. If the corporation has a specific period of time it plans to be incorporation, it must be stated in the Articles of Incorporation.
Key Provisions to Include in Not-For-Profit Corporation Bylaws
The by-laws contain provisions for the regulation and management of the affairs of the corporation. Unlike the Articles of Incorporation, the by-laws are not submitted to the Secretary of State. Also, the by-laws have the ability to be amended by the Board of Directors.
1. Directors and Officers.
Included in the by-laws are the rules to manage the corporation. The Board of Directors manages the corporation, and their qualifications, duties and terms are outlined in the by-laws. The bylaws can also establish a range for the number of Directors allowed, creating a minimum number of Directors needed and the maximum number allowed. A minimum of at least three (3) Directors is required in Illinois. The Director’s term ends at the next meeting for the election of Directors unless their terms are staggered. When there is a vote to decrease the number of Directors, it does not shorten the incumbent Directors term. A Director can resign at any time by a written notice to the board of Directors, the chairman, or the president or secretary of the corporation. Rules for removal of a Director can be integrated into the by-laws as well.
The by-laws can also provide for corporate Officers. The Board of Directors can elect the Officers or the Officers may be selected by another method as outlined in the by-laws. Along with provisions for selecting Officers, the by-laws can specify their duties, authority and removal process.
The initial meeting for the Board of Directors of the corporation, called the Organizational Meeting, begins the process of putting the corporation into operation and approves the by-laws. Election of Officers may take place and afterwards the corporation’s financial affairs, such as a bank account, are established. The by-laws typically specify the requirements and procedure for general meetings of Directors, Officers and Members. The Board of Directors meetings can be held at any location limited to what is outlined in the by-laws. These meeting are open to all Members of the corporation unless they surround discussion of litigation, employee matters, or violations. The by-laws can also specify required notice for meetings.
Member meeting locations are generally specified in the by-laws, or, if not, it is assumed the meeting is held at the registered office of the corporation. An Officer or a majority of the Directors calls the initial meeting of Members. An annual meeting of Members, if the corporation has Members, should take place, and the details of the annual meetings as well as the process for a member or Director calling for a special meeting are generally included in the by-laws.
Voting right for Directors and Members can be limited or enlarged in the by-laws. Members are allowed one vote on each matter submitted to vote by the Members. Should a corporation not have any Members; the Directors typically have the sole voting power.
A corporation may indemnify any person who used to be or currently is a party, or is threatened to be made a party to any pending or completed action, suit, or proceeding because they were once or are currently a director, officer, employee, agent or someone who was serving at the request of the corporation. The matter should include expenses, judgments, fines or amounts paid in settlements that were reasonably incurred by a party in connection to such action. In order to be indemnified, the action must have been made in good faith or in the best interest of the corporation, so long as the action was not unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere shall not create a presumption that the person did not act in good faith or in a manner they believed was in the best interest of the corporation. A majority vote of the Directors who are not parties to such action, suit or proceeding is typically required to approve a specific indemnification by the corporation.
D. Mission Statement.
The mission statement is a brief summary of the corporation’s vision and goals. This statement establishes the purpose of the corporation, found in the Articles of Incorporation. Unlike the corporation’s purpose though, the mission statement is a more broad definition of what the company hopes to accomplish. The mission statement outlines the reasons for the corporation’s existence and may show why the corporation is unique from other similar existing corporations.
The Use of LLCs (and L3Cs) for Nonprofits.
A limited liability company treated as a corporation for federal income tax purposes can qualify as a tax-exempt 501(c)(3) organization. Organizing as an limited liability could provide more management and operational flexibility than organizing as a not-for-profit corporation. A limited liability company treated as a partnership for federal income tax purposes would not qualify as a tax-exempt 501(c)(3) organization, since the Internal Revenue Code of 1986 (the “Code”) provides that a 501(c)(3) organization must be a “corporation, community chest, fund or foundation”. Although a limited liability company treated as a partnership for federal income tax purposes is not a tax exempt entity, such a limited liability company can have both for-profit and not-for-profit entities as Members.
The Illinois Limited Liability Company Act (“LLC Act”) provides for the formation of Low-Profit Limited Liability Companies (sometimes referred to as “L3C’s”). Conceived of as a subset of LLC’s, L3C’s are intended to facilitate the investment by both tax-exempt private foundations and for-profit entities in limited liability companies which significantly further the accomplishment of one or more charitable or educational purposes. A significant purpose of the L3C cannot be the production of income or appreciation of property. However, an L3C is still considered a for-profit company rather than a not-for-profit organization. Both tax-exempt and for-profit companies can invest in and be Members of an L3C. The L3C can be managed by one or more of its Members or can be managed by an outside party. Similar to regular LLC’s, the L3C can operate with a governing board, committees and officers to facilitate management to further its specific operating goals.
The L3C was designed to expand the use of program related investments by private foundations and create entities which can have government, for-profit and not-for-profit organizations and individuals as its Members. A properly structured L3C, operating as a for-profit company, can attract investment capital from both for-profit as well as not- for- profit organizations to achieve a charitable or educational social goal.
The L3C will generally be treated as a partnership for federal income tax purposes. If the L3C is treated as a partnership, income, gain and loss will be allocated among its Members who can be tax-exempt or for-profit entities. Income allocated to the tax-exempt Members will generally be exempt from federal income tax while the income allocated to for-profit entities will be subject to tax. Although L3C’s can be formed to accomplish a broad range of charitable and educational goals, they can be particularly useful in facilitating programs, such as those which increase employment and economic development in our current economy characterized by high unemployment rates, depressed real estate values and slow economic growth.
Similar to regular LLC’s, the L3C can provide a flexible structure with the operating agreement defining management responsibilities, capital requirements and preferential distributions which can vary among the Members. All of the provisions of the LLC Act generally apply to L3C’s, including limited liability of its Members.
L3C’s are organized in Illinois by filing form LLC-5.5 Articles of Organization with the Illinois Secretary of State. In order to qualify as an L3C, the Articles must comply with Section 1-26 of the LLC Act. The filing fee for organizing L3C’s is $500 and the annual report fee is $250, the same as for regular LLC’s. The name of a limited liability company organized as a low-profit limited liability company must contain the term “L3C”.
Illinois is fortunate to be among the first states to enact legislation creating L3C’s, a new tool to harness both for-profit and not-for-profit private financial resources to help solve a myriad of our social problems.