So you want to start a non-profit to meet the needs of at-risk youth? Or perhaps you want to begin a non-profit to provide services to at-risk mothers. Whatever your purpose, you have decided that a non-profit organization is the way to fulfill that mission. Now what? Here are three basic things you should know about starting a non-profit.
First, at its core, a non-profit is a corporation or an LLC. But either way, you must form the legal entity just as you would for any for-profit business. For purposes of today, we're going to assume that you choose to form a corporation. Just like any other any corporation, you must file articles of incorporation with the Secretary of State. However, a non-profit corporation's articles of incorporation must contain certain "magic" language that essentially indicates that the corporation's assets will not be used for any non-profit purpose and that if and when the corporation is dissolved, its assets will be distributed to another non-profit and not any person. Without this magic language, your non-profit corporation will fail the basic test for non-profits.
Second, if you plan to do any fundraising in Illinois, then you must register with the Illinois Attorney General's Office before any fundraising or soliciting takes place. You must also file what is commonly referred to as the "Form 1023" application with the IRS, which is the process for obtaining tax-exemption. Your organization is not automatically exempt from payment of taxes solely because you formed a non-profit corporation. The Form 1023 is a fairly detailed account of exactly what the proposed non-profit is, what services it plans to deliver, what its anticipated budget it, who is running it, how it will make money, who is getting paid and how much, and a lot of other things the IRS wants to know before granting tax exemption. Plan on spending a more than a few hours on this application in order to complete it thoroughly enough to stand a reasonable chance of being granted the exemption.
Finally, one common misconception about non-profits is that they can't make a profit. Nothing could be further from the truth. In fact, if the non-profit doesn't make a profit, or at least break even, then, like any for-profit business, it will likely be out of business. Without going into all of the tax issues and detailed law on the subject, just know that there is no prohibition on non-profits making a profit. The main issue is that the profit must be related to the non-profit purpose for which the organization was granted tax exemption. In other words, if the non-profit mission or purpose is to help at-risk youth find employment and train for job-readiness, then the non-profit probably should not be in the business of owning real estate and leasing space to other businesses as a revenue stream. Revenue earned that is incidental to the non-profit purpose is one thing; revenue earned that is a substantial deviation from the non-profit purpose is quite another thing. Not only will the non-profit risk having to pay taxes on that income unrelated to its non-profit purpose (called "Unrelated Business Income Tax" or "UBIT"), but it could also risk loss of the tax exempt status altogether.
So, go ahead. Form your non-profit. Just remember these basic rules.