Chicago Tax-Exempt Organization Attorneys

Nonprofit Formation and Compliance in Illinois

Nonprofit organizations are similar in structure to regular corporations, the main difference is nonprofits are incorporated to serve the public good rather than turn a profit. With that said, there is nothing preventing a nonprofit from generating a revenue stream. They just cannot pass any net revenue along (in the form of a profit) to the individuals who control the organization. Reasonable salaries can be paid, and of course revenue can be used to cover operating expenses, but nothing can be paid out to employees or officers beyond the reasonable salaries earned for their work within the organization.

Forming a nonprofit and maintaining compliance with the IRS can be quite complicated and often requires the assistance of a tax professional. At the Tax Practice of IIT Chicago-Kent College of Law, we provide an affordable solution to those setting up a nonprofit on a budget, without sacrificing the competent guidance you need. Under the direction of Chicago tax attorney Jon Decatorsmith, we help clients correctly structure their tax-exempt organizations as well as providing ongoing support to keep your entity from running into any trouble with the IRS.

The Internal Revenue Code (IRC) allows 29 classifications of entities that are eligible for tax-exempt status under the 501(c) designation. The type of organization, goals, purpose, and general nature of the planned activities help narrow which of these classifications are available. Additionally, the tax-exempt application process, annual reporting requirements, and whether donations are tax deductible for contributors is determined by this 501(c) classification.

The most common organization is a 501(c)(3); includes those created for charitable, religious, educational, literary, public safety, or scientific purposes. These organizations are tax-exempt and with few limitations, donations are tax deductible for donors.

501(c)(4), created for Civic Leagues, Social Welfare Organizations, and Local Associations of Employees, and 501(c)(7), created for Social and Recreational Clubs, are both tax-exempt, donations to these organizations are not tax deductible for donors.

Formation

In general, a nonprofit has the same essential structure as a for-profit corporation; there are the founding members that set it up, the board of directors that provide general direction, the managers that run the day-to-day operations, and the employees (or volunteers) that do the bulk of the work. Nonprofits may also have an additional class of people known as members who work for the organization and often take on temporary leadership roles. Members are not necessary; any given nonprofit may use a membership structure (or not) as it befits their mission.

Nonprofits and Taxation

Federal tax-exempt status does not relieve an organization of all tax-related issues, often to maintain this tax-exempt designation, organization face unique tax-related challenges and reporting requirements. For example, if your organization makes any amount of money through profit-generating processes not directly related to the tax-exempt purpose, the unrelated business income is taxable, requiring careful consideration. In addition, a tax-exempt organization still must complete complex annual tax filings (e.g., Form 990).

Tax-exempt organizations incorporated in Illinois are subject to additional state requirements, including Secretary of State and Attorney General registration and annual reporting.

Illinois requires all nonprofit organizations holding or soliciting donations for "charitable purposes" to register with the Illinois Attorney General pursuant to (760 ILCS 55/) Charitable Trust Act. The Charitable Trust Act provides a few exceptions to the registration requirement including government organizations, schools, and hospitals.

The Tax Practice is deeply knowledge and ready to assist tax-exempt organizations, new or well-established, navigate these unique challenges requiring tax expertise and strategic planning. We provide continuing counsel, federal and state compliance advice, and offer a broad range of services including drafting bylaws, conflict of interest policies, and corporate resolutions; preparing, submitting, and negotiating tax-exemption applications; and reinstating tax-exempt status for those organizations that experienced a revocation. The Tax Practice understands the nature of public service work, has experience dealing with transitory and volunteer representatives, and supports the work directly with affordable legal fees for high quality services. For assistance on a full range of tax-exempt related matters, contact the Tax Practice of IIT Chicago-Kent College of Law today at 312-906-5041 for a free consultation.