Essential Organizational
Steps and Initial
Nonprofit Documents
Prepared
by
Mosher & Associates, LLC
33 N. LaSalle St., Ste. 3400
Chicago, IL 60602
312-220-0019
www.mosherlaw.com
© Mosher & Associates, LLC
ORGANIZING A NOT-FOR-PROFIT CORPORATION
Initial Planning for Nonprofit Organizations
Successful nonprofit organizations always have a plan to develop and operate a coherent program that
serves the intentions of the founders to benefit a specific part of our society or its environment. If the
founders are well advised by legal counsel, they will start by developing an effective business plan. The
plan will enable the founders to establish an initial structure that will have reasonably specific ideas about
growth in coming years. The well-laid plan will begin with modest expectations in accord with available
human and financial resources. Such plan will clearly identify the beneficiaries, who are reasonably
specific, so that the beneficial services can be measurable. The plan should articulate the beginning, as
well as the ending point. These points are not so much a matter of chronology but rather a process
whereby the founders know when it is good to start and when the plan should conclude.
The initial business plan is not a complete document. It is simply a series of questions that, when
addressed, will describe a nonprofit organization that may be viable and worthwhile. Constructing a
business plan is comparable to writing a good story. The author must first consider five essential
questions, specifically who, what, where, how, and when. Not only are these questions universal to good
composition, they are the building blocks for constructing a nonprofit and thus essential to every effective
business plan.
This chapter is part of a “how to” handbook written for attorneys working with the laws of Illinois to
facilitate the initial start-up of a nonprofit organization, as well as to help with the ongoing management
of such organizations. It is common for a small group of people to identify a need within their society or
environment. Local residents need medical services, food sources, schools, churches, and/or some other
social institutions that are both lacking and desired by the community. The object may be, for example,
environmental and involve clearing a waterway for a recreational park or cleaning debris dumped by an
irresponsible neighbor. The list of motivations for nonprofit organizations is limited only by the
imaginations of the founders and the resources available to use. While government is usually the
institution for very large projects, there are over a million small nonprofit organizations that make life for
most citizens more bearable if not enjoyable. Whenever two or more people begin to plan a beneficial
organization, it is good when legal counsel can help to plan an effective development. To be an inspired
founder does not always require being rational, practical, or reasonable. The focus of legal counsel is to
sort through various social and emotional concerns and to make it happen.
First Question: Who Are the Founders?
The who question involves more than just the names of the people who are sitting in the attorney’s
office. This question seeks information on several different levels. The more attention counsel pays to this
issue at the beginning, the more effective the business plan will be. At the most basic level, the “who”
question speaks to the names and addresses of the incorporators. In Illinois, this would call for three or
more persons to participate. The list of incorporators is important, but who the founders are is more
involved. It is important to know about each founder’s motivation for participating in the project and what
resources each founder brings to the business plan. It is not good when one person develops the business
plan without considering the interests of the whole group. It is easy for some people to simply “tag along”
if someone else does all the work. It is not enough to just show up at the meetings. Legal counsel should
work to identify the interests of each founder.
Every new nonprofit organization is the product of several people who perceive a need and agree to
invest personal energy and financial resources to bring about the new entity. Each of the founders comes
to the table with different basic motivations. Some are deeply committed to the project, while others are
just there because they are doing a friend a favor. Some founders are creating a job for themselves and
bring significant enthusiasm to the planning table. Others are merely curious or have personal motivations
that do not rely on the success of the program. For example, some founders are motivated by simply being
associated with a good idea or they merely seek the company of others who want to establish a helpful
program. Some founders have financial and personal resources that will be committed to the start-up
program, while others may have good ideas but cannot commit personal resources apart from attending a
few meetings. The who question does not assign “good” or “bad” to the founders’ motivation. The
question merely seeks an accurate assessment of the resources that will be available. The question also
suggests that the governing structure of the new organization should involve committed leaders and if a
founder wants to start a new career, then the assignment of authority and responsibility should be
thoughtfully addressed. A career builder is an essential resource in establishing many organizations, but
the founders must consider problems with conflicts of interest. Also, the problem of “founder’s
syndrome” must be anticipated. Founder’s syndrome (discussed further in §1.32 below) is an important
concept that can be destructive to a nonprofit corporation unless carefully addressed in the initial
corporate structure.
The who question calls on the founders to disclose their personal feelings and thoughts and requires
honest and thoughtful input for the benefit of all participants. Many nonprofit organizations will fail in a
short time if the personal commitment of each founder is not fully disclosed and integrated into the
analysis of resources. Sometimes it seems that having several warm bodies on the board of directors is
good enough. This idea is a very bad plan and will diminish the venture before it has started to grow.
Every director must bring valuable resources to the job.
The word “founders” should be considered in the larger context of the people who will have a
significant influence over the development and ongoing management of the nonprofit. A person seeking
to develop his or her career through the nonprofit may be employed to be the chief executive officer, but
not appointed as a governing director. Such structure may avoid significant conflicts of interest in the
long run. Founders who simply want to be part of forming a new organization may not be appropriate for
consideration as long-term board members. For example, the mayor of the local town may bring a public
image to the new entity but do not count on the mayor to help in the hard work of starting-up the
nonprofit.
Second Question: What Is the Purpose of the Organization?
This question may seem to be obvious. The founders want to feed the hungry, educate the illiterate,
house the homeless, etc. Maybe the founders want to build a museum or establish a social club to
encourage local fellowship among the farmers in the area. Whatever seems to be motivating the founders,
legal counsel should examine the true essential purpose of the new organization. When two or more
founders come together, there will be more than one reason that motivates their efforts. It is not enough to
prepare a purpose statement, such as “to be organized and operated exclusively for religious, charitable,
or educational purposes.”
“What” is the organization going to do? A general reference to the basic tax law requirements is too
vague to be a useful statement of purpose. The founders need the help of legal counsel to formulate a
purpose that will guide the operation for years to come. The purpose statement will motivate future
leaders and identify products or services for public benefit. To prepare a succinct statement of what the
organization is doing will often be most important to motivate the donors who will make charitable
contributions. Without the donors’ understanding and support, most charitable organizations (the largest
component of nonprofit organizations) will fail in a short time. When the business plan states what the
organization will do, it is very important that the statement be reasonable and practical. In other words,
the purpose must be attainable. The organization cannot save the world, eliminate poverty, or provide all
businessmen with a place to discuss commercial ideas. Every organization is limited by its resources that
include both leadership and finances. It is common for founders to be zealous about the new organization.
Legal counsel can have a significant impact on the new organization by providing a rational outside
perspective for ambitious founders.
Third Question: Where Will the Organization Serve?
The where question definitely speaks to the physical location, but it also addresses the beneficiaries
or members of the organization and where they are located. Before the beneficiaries can be located, they
must have a reasonably specific identification. After the what question is answered, the answer to the
where question will become more obvious. With the increased development of electronic communication
and expedient travel, the physical location or principal office of an organization is less critical, but the
founders still need to focus on the people who will serve and/or be served. For example, if the new entity
will provide food and clothing for impoverished people, then the where will speak to the specific group of
people at a specific location. The words “urban” or “rural” are too vague. The west side of Chicago is
more specific, but may still describe a daunting mission. Unless a new organization is endowed with
substantial financial resources, the where question should address a specific urban neighborhood or a
rural village that includes a target population that may be impacted by this new charitable program.
A disaster relief program may not involve a specific physical location. The answer to the where
question will need careful attention that gives sufficient clarity of purpose to be useful in directing
resources. For example, a program to relieve distressed victims of forest fires in the United States would
do well to consider locating in a western state where such disasters are more prevalent. Even an
international relief program like the Red Cross must have a focus for the location of program services.
In proposing a business plan, the founders must be attentive to the location of the program in
relationship to the beneficiaries. The same consideration is true for a membership organization, such as a
church or synagogue, a social club, or a trade association. Where are the members located? A religious
fellowship will want to locate near the homes of its worshippers and a nationwide trade association will
locate near a major airport, even if its annual conventions will be conducted in different areas of the
country. In any case, a business plan is not complete without a clear statement as to location in relation to
the object of its beneficiaries.
Nonprofits, both in Illinois and elsewhere, basically fall into two categories: (a) those without
members, such as charitable service organizations, schools, and agencies that tend to serve an indefinite
population, and (b) membership organizations that have a defined group of beneficiaries, such as
churches, social clubs, and agencies that rely on the support of a specific committed constituency. It is
important that the founders consider who will benefit from the organization’s services.
The General Not For Profit Corporation Act does not require a not-for-profit corporation to have
members, nor does it require that any member have a vote on any subject. If they exist, they should be
there for a reason. Members have two potential purposes in a nonprofit organization: (a) they may be part
of the organization’s governance structure, and/or (b) they may be the organization’s beneficiaries. The
issue of membership, therefore, must be considered in the context of leadership and the organization’s
purpose.
Organizations such as churches, social clubs, self-help groups, cultural institutions and societies, and
trade associations are oriented to serving members. They exist because a group of founding members
joined together to form an organization from which they expected to receive some form of benefit or
service. They will have members performing governance activities, and their bylaws will reflect their
presence in voting for the organization’s board of directors. When forming a membership organization,
care should be taken to define members’ corporate authority, especially what matters will be subjected to
vote. The more authority reserved to the membership, the more cumbersome the corporate operations will
be. The practitioner must balance the need for membership involvement and the credibility factor of an
active membership with the potential for unwieldy procedures and corporate inertia.
The IRS requires that charitable beneficiaries be identified, whether by age, sex, geographic location,
income, disease, state of residence, religion, etc. While there may be no limits on what groups the
organization may seek to benefit, founders must understand that there are many types of people and
organizations that do not qualify as objects of charity under IRS regulations. The selection of
inappropriate beneficiaries may disqualify the organization from being granted exempt status. The
specific issues related to state and federal tax-exemption are discussed in detail in Chapter 2 of this
handbook.
Fourth Question: How Will the New Organization Operate?
This planning question raises at least two important aspects that cannot be addressed until the
previous questions are answered. How the program will operate looks to (a) the design of the operation,
and (b) the finances necessary to operate. If the founders are medical professionals who want to provide
emergency medical services for indigent people in the Englewood neighborhood of Chicago, they will
need to anticipate the significant physical aspects of a building or a mobile medical unit. If the founders
plan to raise public awareness about environmental hazards, the physical program development will focus
on intellectual property and distribution issues. The practical structures of these two programs are very
different and both are very expensive. Clearly the indigent patients will not finance the programs with
their service fees, so the founders have a paramount question as to how the program will be financed. The
same issues confront the founders of any nonprofit organization.
With a concise statement of purpose and a clear set of priorities as to what benefits the members
and/or beneficiaries will be receiving, the founders can prepare an operational plan that will best
accomplish their purposes. A good operational plan provides for programs and services and addresses
staffing issues, finances, facilities and equipment, governance, and fund-raising. Starting a new
organization without a complete operational plan will lead to confusion and frustration for the founders,
as well as their targeted funding sources. Without a good operational plan, the organization may not
obtain sufficient financial support, no matter how worthy its purpose or how needy its proposed
beneficiaries. Furthermore, when applying to the IRS for tax exemption, the how question of the plan is
carefully scrutinized. The IRS Form 1023, Application for Recognition of Exemption, Under Section
501(c)(3) of the Internal Revenue Code, www.irs.gov/pub/irs-pdf/f1023.pdf and Form 1024, Application
for Recognition of Exemption on Under Section 501(a), www.irs.gov/pub/irs-pdf/f1024.pdf, place
considerable emphasis on operational issues such as staffing programs, monitoring or governance issues,
and most of all finances, including income and expenses.
The second aspect of the how question addresses the issue of revenue generation. With the exception
of private family foundations, this element is always a challenge. Many nonprofits are financed by
charging fees or tuition. Some examples include schools, childcare programs, and trade associations. In
these cases, the business plan may look very commercial. The financial formula involves the number of
anticipated participants times the amount of individual payment, which will equal the total anticipated
revenue minus expenses. However, every fee-based public charity will look to generate charitable
contributions, which are difficult to anticipate. The large majority of nonprofits rely primarily on public
gifts to operate. Anticipating revenue from charitable donors is so difficult that many founders simply
hope for the best. They may think “if we build it, they will come.” This is a very poor planning technique.
There is a large and growing business community that focuses on charitable fund-raising. The founders
are well advised by legal counsel to employ a fund-raising consultant who can help to form a realistic
fund-raising plan. This is a difficult task but very important to the ultimate success of a new nonprofit.
From the perspective of the future donors, the founders must be able to project a beneficial program that
has a reasonable potential to succeed. Founders who are in the dark regarding prospective financial plans
are likely to stay in the dark and never see the light of a successful nonprofit program.
When state government regulation is involved, planning is an especially critical process. Any not-forprofit corporation that operates a school; medical or mental health facility; child welfare agency; or
program involving food preparation, housing, education, and child care must anticipate regulations by
various state agencies. If the organization requires a certificate of need, license to operate, or registration,
then the founders will not be able to commence operation until the operational plan has been fully
reviewed and the appropriate certificate or license issued or registration effected.
Finally, a realistic and credible organizational plan is a necessary part of an exemption application
under Internal Revenue Code §501(c)(3). Legal counsel should evaluate the plan to determine if the
organization can qualify for tax-exempt status and help the founders shape the plan if necessary to meet
IRS requirements. A poorly developed plan will delay approval by weeks or even months. Sometimes, a
poorly drafted application will lead to such a deadlock with the IRS that the corporation must be
abandoned and a new one started in its place, with a new name and new federal employee identification
number (FEIN or EIN), so a fresh start can be made with the IRS on the exemption process.
Question Five: When Will the Organization Operate?
As with the preceding four questions, when involves several aspects of nonprofit organization and
operation. In some ways, timing is everything. Most founders are very excited about the new nonprofit
organization and want to start operations as soon as possible. Perhaps there is a very urgent social need
and a quick response seems necessary. It may be that legal counsel can advise the founders that a hasty
response is often a poor response. Whatever problem motivates the urgency it is probably a recurring
issue. Organizing a nonprofit organization is hard work and founders need to think of the long term. The
urgent need may pass to another agency so that the founders will be well prepared for the next recurrence.
It usually takes two to three years to get from the inception of a business plan to actually providing an
effective charitable or educational program. A good solid business plan takes time and effort, which will
have a great payback over time. The plan should include a detailed time table that includes all important
development steps in a form that all founders can agree on. The time table should include specific task
assignment that gives all of the founders a part of the job.
Another aspect of the when question concerns the corporate governance structure. When an earnest
group of individuals develop a new nonprofit organization, the answer to the when question always seems
to be now. Energy is focused on the visible horizon and founders often fail to consider the future
ramifications of good governance and effective succession planning. Legal counsel must be aware of the
present urgent needs and simultaneously hold the view to future operations. Seldom do the founders plan
to terminate their efforts in two or three years. Nonprofit corporations are usually organized in perpetuity.
An essential document for the governance of a well-established nonprofit organization is a well
prepared and relevant set of bylaws. It is easy to prepare a standard form of bylaws and let the directors
work out the problems that may occur. It is not uncommon to find that the founders adopted bylaws that
were found on the internet or were being used by another similar organization. Generally the board of
directors can work out problems when it is a harmonious group. However, many insidious governance
problems can start with the initial bylaws if the founders fail to appreciate the when question. More
specifically, the bylaws should provide a plan for succession of the leadership. It is seldom an asset for a
nonprofit organization to have a governing board that is entrenched, old, and tired. If the bylaws include
time limits on the duration of a director’s tenure, then there is a planned periodic review of each person’s
effectiveness. A tired director can graciously remove himself or herself from the ongoing governance
work. Maybe he or she can be a committee chair and utilize his or her experience. It is even better if the
bylaws require every director to go off the board for at least a year at a predictable date. If the when
question does not address leadership succession, the organization will often fall into a lethargy because
the directors are tired but they cannot gracefully resign from the board. If directors anticipate a maximum
six year term of office, they will be more inclined to think about recruiting new people to carry on the
mission. The directorial succession plan should be addressed early in time and before any of the founders
become entrenched in the governance structure.
If the new organization is a “career builder plan,” the succession issue may be very difficult. A
service organization centered on the personal skills of one (or a few) founders will plan for a long period
of service. Job security becomes paramount to the skilled person who wants to build a personal career. In
most cases, the when question will make it clear that the skilled professionals should be employees with
good service contracts and the directors should be a separate board of governors.
Founder’s Syndrome
An unfortunate governance condition that affects many valuable nonprofit organizations is sometimes
called “founder’s syndrome.” This problem is most observable when the nonprofit organization is in
trouble. Usually, the condition occurs simply because the enthusiastic founders are tired or discouraged
and have no new ideas or resources. This often happens when the founders did not address the when
question in the initial business plan. When a troubled nonprofit organization seeks help, the potential
helpers will not go near an organization with founder’s syndrome. Why would anybody join a governing
board that is closely controlled by a small group of entrenched founders? Why would new donors want to
throw money down a dry well? When the nonprofit organization is troubled, the problem is usually bad
governance. While it may be easy to blame the administrative staff, failure of a nonprofit is usually
caused by a governing board that did not consider the when question.
Often, founder’s syndrome is a serious problem caused by one or two persons who believe they are
indispensable. They believe the nonprofit organization is “their baby” and they are personally responsible
to ensure its success. A truly effective nonprofit organization evolves over decades and individual people
are usually effective for only five to ten years. Any effective organization needs new ideas and fresh
resources, which is seldom a virtue of tired leadership. The organization must develop a corporate culture
that encourages new people with new resources.
In the worst case scenarios, founder’s syndrome starts in the mind of a single, respected leader who
simply wants to be in control. The well-being of the organization is secondary to the personal status and
control of an individual. These people often helped to establish the organization and always wanted to
stay in control. If the initial board of directors had carefully considered the who question in the context of
the when question, then the over-zealous and controlling founder may have been diverted and, in time,
removed from leadership. Such founders seldom see themselves as a problem. However, if legal counsel
is attentive to all five preliminary questions, the onset of founder’s syndrome may be avoided. See
Stephen R. Block, WHY NONPROFITS FAIL: OVERCOMING FOUNDER’S SYNDROME,
FUNDPHOBIA AND OTHER OBSTACLES TO SUCCESS (2003).
Dissolving the Corporation
When it is time to cease operations, the business plan should anticipate dissolution of the corporation.
The well-founded nonprofit organization will have a business plan that effectively addresses the
following key questions:
(a) Who are the founders and the governing board?
(b) What are the specific purposes of the organization?
(c) Where will the organization operate to affect a specific community or group of beneficiaries
and/or members?
(d) How will the organization operate programs and fund its activities?
(e) When will the organization commence operations that will be effectively governed for many years
to come?
The end game, which is part of the when question, anticipates the eventual dissolution of the nonprofit
organization. The founders must understand at the start that a tax-exempt organization belongs to the
public. Illinois not-for-profit corporations cannot have stockholders or private ownership of any type.
Federal and state tax laws generally prohibit private inurement of nonprofit assets. Too often, founders
and subsequent leaders put too much personal interest and effort into the development of a nonprofit
organization. When it comes time to dissolve a nonprofit, the governing board or perhaps an individual
with a bad case of founder’s syndrome will exercise private control over the public assets of the
corporation. This problem is a very human one that should be openly discussed at the beginning of the
organization and throughout its existence. Legal counsel should emphasize that the nonprofit organization
is a public effort and is not to be considered private property.
Before leaving the topic of forming a good business plan, the founders should realize that this
document will be valuable in many ways. As was mentioned in §1.30 above, a well prepared business
plan essentially addresses the questions raised by the IRS in both the IRS Form 1023, Application for
Recognition of Exemption, Under Section 501(c)(3) of the Internal Revenue Code, www.irs.gov/pub/irspdf/f1023.pdf and Form 1024, Application for Recognition of Exemption on Under Section 501(a),
www.irs.gov/pub/irs-pdf/f1024.pdf. Preparing either of these applications for tax-exempt determination
can be a complex task. Most of the preparer’s work can be done if the founders will take time to build a
good plan.
Furthermore, a good business plan creates an excellent foundation document that should be reviewed
in the years to come. The directors or the governing board should periodically discuss the business plan
and note areas of change and new developments. Similar to a navigator on a ship at sea referring to a
compass to find north, consulting the business plan can remind directors of the reasons that motivated the
corporate formation. This comment does not suggest that the business plan is concrete and unchangeable.
Rather, the governing board can use the original business plan to develop rational changes in course that
are generally determined by the group of directors to be good for the nonprofit organization.
If the founders are not experienced in operating a not-for-profit organization, they may benefit from
reading books on management (see the bibliography in §1.124 below for recommendations) or by taking
seminars or classes on not-for-profit management, financial management, human resource management,
or fund-raising techniques. Many business books written for the for-profit sector will also be useful to
not-for-profit leaders. Most metropolitan areas in Illinois have local organizations that provide technical
assistance to not-for-profit fund-raisers and managers. The Donors Forum of Chicago
(www.donorsforum.org) maintains a “foundation center library” of resources for exempt organizations
that solicit charitable grants from local, regional, or national foundations. Similar foundation center
libraries are available elsewhere in Illinois.
Organizational Documents
Many initial incorporation and related registration documents are preprinted forms supplied by the
state or federal governments. Both the Illinois Secretary of State’s Office (www.cyberdriveillinois.com/)
and the IRS (www.irs.gov) websites provide commonly used forms in Adobe Acrobat format.
Articles of Incorporation
The organizational document, is Secretary of State Form NFP 102.10, Articles of Incorporation,
www.cyberdriveillinois.com/publications/pdf_publications/nfp10210.pdf, which sets forth the
organization’s articles of incorporation. This document, when approved by the Secretary of State, is the
corporate charter giving legal existence to the new entity. Articles of incorporation are not difficult to
prepare, but care should be exercised to complete them properly since they become the cornerstone of the
organization and are frequently asked for to establish corporate legitimacy and credibility. In other words,
the articles create a first impression on grant-makers and government agents.
Form NFP 102.10 must be prepared in duplicate, neatly and legibly, using black ink only, and must
include the incorporators’ signatures. All documents filed with the Secretary of State must have original
signatures. The writing must use characters of the English alphabet, Arabic or Roman numerals, or other
symbols capable of being readily reproduced by the Secretary of State’s Office. See 805 ILCS
105/104.05.
Naming the Corporation
Article 1 of the articles of incorporation sets forth the name of the new not-for-profit corporation.
Naming the organization can be a challenge, especially for charitable organizations. Corporations
registered in Illinois must have names that are distinguishable from each other. Section 104.05 of the
General Not For Profit Corporation Act gives the Illinois Secretary of State limited discretion to decide
whether a name is distinct. 805 ILCS 105/104.05. Because certain words are popular in describing
churches and charities, these entities often experience considerable difficulty in obtaining a name that is
both suitable and available. While the Secretary of State’s website offers a fairly complete listing of
already-registered names, only a check with the Illinois Secretary of State’s Office at 800-252-8980 will
assure the availability of a name chosen by an organization’s founders. The Secretary of State’s website
also includes valuable information about the guidelines used to determine distinguishable names. After
July 2001, the Secretary of State was authorized to require that the letters “NFP” be included at the end of
a nonprofit corporate name unless the name itself clearly identifies the charitable purpose of the
organization. The statute does not define “NFP” but it can be assumed the legislature intended it to mean
“Not for Profit.” For example, if the new name is to be “ABC Charities” or “XYZ Church” the reference
to NFP is not required. However, if the name is more ambiguous, such as “Loving Care Services” or
“Chicago Homes for People,” the Secretary of State will return unfiled articles until the “NFP” is
included with the name. It is sometimes difficult to predict how the persons working with the Secretary of
State will react to a given name. The best thing to do is to call the Business Services Department at the
Secretary of State and inquire about the “NFP” requirement before filing a certain corporate name.
Any organization that will invest substantial resources in the goodwill of a corporate name should do
a complete name search on a national trademark/service mark database. A qualified trademark can be
protected by federal registration. Likewise, Illinois law provides a more limited trademark protection. The
Trademark Registration and Protection Act, 765 ILCS 1036/1, et seq., provides protection limited to
Illinois. Registration under the Illinois Act provides conclusive evidence as to when an organization
started using a protected name and may be valuable when trying to establish priority of use of a name or
mark. In any case, a comprehensive search may alert the founders that the name they have chosen is
potentially deceptive because of its similarity to another name already in use and may present a future
conflict if operating in an overlapping jurisdiction.
Registered Agent and Address
Article 2 of the articles of incorporation lists the name and address of the organization’s initial
registered agent and registered office. Section 105.05 of the General Not For Profit Corporation Act
requires every authorized corporation in Illinois to maintain a registered agent at an address within the
state. 805 ILCS 105/105.05. Choosing the person who will serve this function is an important decision.
The registered agent receives official correspondence from the Secretary of State and is designated by law
to receive service of process in all legal actions. Not-for-profit corporations can be and often are dissolved
because their registered agent fails to process annual reports for the Secretary of State. This problem
usually comes to light when an organization is asked to provide proof that it is in “good standing” in order
to receive a major government contract or grant and discovers that it has been administratively dissolved
by the Secretary of State. The effort to reinstate the organization can be costly, in terms of both time and
expense, and sometimes can result in loss of a contract or grant, due to deadline pressures and credibility
issues.
When preparing the articles of incorporation, a registered agent should be chosen who has a stable
address, is aware of the types of legal notices that may be received in that capacity, and will efficiently
process annual report duties. The registered agent may be an individual or a specially qualified
corporation, but it cannot be the not-for-profit corporation itself. Several service corporations in Illinois
will act as a registered agent for an annual fee. Often, legal counsel for the corporation will serve as a
registered agent so that legal notices will be immediately served on the person who will be required to act
on them. As with directors, the address of the registered agent must be a specific street address in Illinois
and cannot be a post office box. The principal business address of the corporation may be the registered
office, but, in that case, it must also be a principal location of the person who is identified as the
registered agent.
Initial Board of Directors
Article 3 of the articles of incorporation identifies those who will serve as initial directors of the
organization. Section 108.10(a) of the General Not For Profit Corporation Act requires that three or more
initial directors must be named in the articles of incorporation. 805 ILCS 105/108.10(a). After a not-forprofit corporation has been chartered, its bylaws will provide for a prescribed number of ongoing
directors.
Directors must be natural persons who can interact with each other in order to formulate policies and
make corporate decisions; a corporation, partnership, trust, etc., may not be a director. There is no legal
requirement that a director be an Illinois resident although bylaws may specify such residency. Directors
may reside anywhere, subject only to any qualifications that are set in the articles of incorporation or
bylaws. Many Illinois not-for-profits have no directors or officers located in Illinois.
The articles of incorporation must include the name and residential address of each initial director.
805 ILCS 105/102.10(a)(5). While some directors do not want their private residence listed on a
document of public record, if the Secretary of State identifies a post office box or an office address, rather
than a home address, the articles will be returned to be corrected.
The articles of incorporation do not describe any initial officers of the corporation because drafting
Secretary of State Form NFP 102.10, Articles of Incorporation, www.cyberdrive
illinois.com/publications/pdf_publications/nfp10210.pdf, precedes both the act of incorporation and the
first meeting of the board at which officers will be elected. The Secretary of State will reject any articles
of incorporation that refer to an initial director as an officer as well.
Corporate Purposes
Article 4 of the articles of incorporation sets forth a statement of the purposes for which the
corporation is organized. Section 103.05 of the General Not For Profit Corporation Act permits a wide
variety of corporate purposes that have been legislatively determined to enhance the well-being of the
general public or some significant part thereof. 805 ILCS 105/103.05. Corporate purposes authorized by
the Illinois legislature are diverse, and many are connected with special interests or social policy issues.
Some, such as “charitable,” “civic,” and “scientific,” are vague and may include a multitude of qualified
activities. Others are specific. The articles of incorporation must include at least one (but may include
more than one) of these purposes. To simply reference “any and all the purposes allowed under the Act”
will not suffice. The Illinois statute provides thirty-two purposes for which an organization may be
incorporated. Most common purposes include “charitable,” “educational,” and “religious.” The other
twenty-five purposes include more specific nonprofit endeavors. For example, some charitable groups
are organized for eleemosynary purposes.
The statement of corporate purposes in the articles of incorporation will become a key focus of the
newly incorporated organization. Its directors will refer to the purpose statement when developing initial
programs and services and as they promote public awareness of the organization’s goals and objectives.
Major funding sources will form their first impressions of the organization by reading its purpose
statement. For these reasons, if none other, this is not a good place to use overly general or vague
language. For example, if an organization states in its articles that “the purposes are to be exclusively
charitable and educational” but provides no specifics, the statement of purpose will give directors no
guidance in forming corporate policy, nor will potential grant-making foundations be able to decide
whether the organization is acceptable under their guidelines.
A matter of concern to nonprofits operating in Illinois is usually the need to focus the corporation’s
purposes as religious or charitable or educational. There is experience when working with the Illinois
Department of Revenue that sales tax exemption and/or property tax exemption may be disaffected when
the corporation’s purposes are too broad. The Illinois Tax Code designated these three categories
(religious, charitable, educational) under distinct statutes. On several recent occasions, the agents of the
Department of Revenue have challenged property tax exemptions of, for example, applicants seeking
qualification as both religious and charitable. It seems that the underlying test for these two tax-exempt
classifications may be in conflict in the official opinion of certain Department of Revenue determination
specialists and some administrative law judges. Practitioners representing a charitable organization in
Illinois are well advised to carefully consider the restrictive legal environment in Illinois when preparing
the corporate purposes for an organization with broad altruistic intentions.
Some practitioners argue that a broad statement of corporate purpose allows future managers to
change or expand corporate purposes without needing to amend the articles of incorporation. This may be
true, but it just as easily will fail to control or limit the direction of future development. On the other
hand, a limited statement of purpose may require a later revision as the organization’s scope and vision
grow. The latter problem raises the question of what happens when funds raised for an entity’s narrow
purpose are applied to another purpose. More than a charter amendment is required, as the IRS and the
Illinois Attorney General may have to grant their approval to the change in use.
At this point it is useful to note that nonprofit corporations can be organized to many purposes other
than religious, charitable, and educational. However, in an effort to make this chapter more readable, the
authors have provided several sample language provisions that are intended for use with corporations
organized in accord with Internal Revenue Code §501(c)(3). The reader will want to adjust the forms if
the intention is to develop a social club, a trade association, a civil welfare society, etc. An example of a
statement of corporate purpose is as follows:
____________ is organized and operated exclusively for charitable purposes in accordance with
§501(c)(3) of the Internal Revenue Code of 1986 (or the corresponding provision of any future
United State Internal Revenue law and referred to below as the “Code”). More specifically, the
corporation is organized to provide [a food pantry, homeless services, a “clothes closet,” and other
beneficial services for low-income residents] located in [Westside neighborhood of Chicago]. [NOTE:
Be sure to avoid generalized purposes.]
This statement of purpose is qualified under the NFPCA: it provides clear guidelines to the organization’s
founders and leaders during the organization’s lifetime, donors know what the organization will do with
their money, and it sends the message that it will be organized and operated in accordance with IRS
regulations for exempt organizations. However, because the geographic area is so limited, the statement
of purpose will have to be amended if the organization wishes to enlarge its program or service area. For
this reason, it may be wise to exclude the geographic restriction in the original articles.
The not-for-profit organization may seek to engage in professional services that are regulated by the
Division of Professional Regulation, provide service programs licensed by other departments of Illinois
government, or run degree-conferring schools that are regulated by the Illinois Board of Higher
Education. Founders of such organizations must conform with statutory licensure requirements and
limitations if they invoke them by the way they define their charitable purpose. If a not-for-profit intends
to organize for purposes that may be similar to but outside the scope of those that are regulated, it must
note that limitation in the statement of corporate purpose. For example, it is prudent to state, “The
corporation will not operate a school or similar institution regulated by the Illinois State Board of
Education,” if the not-for-profit intends its program to be educational but not within the definition of a
school. These same issues apply to organizations providing low-income housing or other regulated
activities. See §§1.12 – 1.25 above.
A final issue having to do with the purpose statement concerns the interface between state and federal
exemption regulations. To be qualified under Code §501(c), corporate purposes must include enabling
language if the purpose statement changes the organization’s classification for exemption purposes. For
example, if a not-for-profit intends to be a “supporting organization” to another qualified §501(c)(3)
organization, its purposes should specifically refer to the qualified organization it will support. A trade
association should specifically identify the trade or business group being served. More detailed
information about IRS requirements is provided in Chapter 2 of this handbook.
Other Provisions, Including Limitation of Authority or Special Powers
Article 5 of the articles of incorporation allows the incorporators to include an addendum containing
other provisions. Most drafters use this addendum to set forth special powers and limitations that will
qualify the organization to seek IRS recognition as exempt from taxes. The special issues to be addressed
are described in IRS Publication 557, Tax Exempt Status for Your Organization, www.irs.gov/pub/irspdf/p557.pdf. The following is a paraphrase of language that has been accepted by the IRS for the past
several years:
Limitations of Corporate Authority
A. The Corporation, being organized exclusively for religious, charitable, and educational purposes,
may make distributions to organizations and individuals in furtherance of its corporate purposes and in
accordance with §501(c)(3) of the Code.
B. No part of the net earnings of the Corporation shall inure to the benefit of, or be distributable to,
its members, directors, officers, or other private persons, except that the Corporation shall be authorized
and empowered to pay reasonable compensation for services rendered and to make payments and
distributions in furtherance of the purposes set forth in Article 4 above.
C. No substantial part of the activities of the Corporation shall be the carrying on of propaganda, or
otherwise attempting to influence legislation, and the Corporation shall not participate in, or intervene in
(including the publishing or distribution of statements concerning), any political campaign on behalf of
any candidate for public office.
D. Notwithstanding any other provision of these articles, the Corporation shall not carry on any other
activities not permitted to be carried on (1) by a corporation exempt from federal income tax under
§501(c)(3) of the Code or (2) by a corporation contributions to which are deductible under §170(c)(2) of
the Code.
E. Upon dissolution of the Corporation, the Board of Directors shall, after paying or making
provision for the payment of all of the liabilities of the Corporation, dispose of all of the assets of the
Corporation exclusively for the purposes of the Corporation in such manner, or to such organization or
organizations organized and operated exclusively for charitable, educational, religious, or scientific
purposes as shall at the time qualify as an exempt organization or organizations under §501(c)(3) of the
Code, as the Board of Directors shall determine. Any such assets not so disposed of shall be disposed of
by the appropriate court of law of the county in which the principal office of the Corporation is then
located, exclusively for such purposes or to such organization or organizations, as said court shall
determine, that are organized and operated exclusively for exempt purposes.
Paragraph E, the dissolution clause, is analogous to a last will and testament. It states that in the event
of the termination of the organization, assets will go to another qualified §501(c)(3) organization. If the
organization is a subsidiary of another exempt organization, or if the founders know of a specific existing
tax-exempt organization that should take assets upon dissolution, then the practitioner should use the
following paragraph instead:
E. Upon dissolution of the Corporation, the Board of Directors shall, after paying or making
provision for the payment of all of the liabilities of the Corporation, distribute all assets, both real and
personal, to ____________, being qualified as an exempt organization or organizations under §501(c)(3)
of the Code, or if such organization or organizations have dissolved or are unwilling or unable to accept
said assets under the conditions of §501(c)(3) of the Code, to another such organization or organizations
organized and operated exclusively for charitable, educational, religious, or scientific purposes as shall at
the time qualify as an exempt organization or organizations under §501(c)(3) of the Code, and shall use
said assets exclusively for the purposes of the Corporation in such manner, or as the Board of Directors
shall determine. Any such assets not so disposed of shall be disposed of by the appropriate court of law of
the county in which the principal office of the Corporation is then located, exclusively for such purposes
or to such organization or organizations, as said court shall determine, that are organized and operated
exclusively for exempt purposes.
In addition to IRS-mandated language, this article is a suitable place to insert other special powers or
limitations. A corporation formed for a specific time-oriented purpose may include a provision for
automatic dissolution at the end of its intended duration. In the absence of such a provision, the
corporation’s duration is presumed to be perpetual. Membership corporations may use this section to
include special rights and powers reserved to their members, such as the rights to elect directors, to sell
property, or to amend the articles of incorporation or bylaws. In addition, corporations organized to
provide low-income housing or other federally funded programs will need to include additional rights and
responsibilities particularly tailored to satisfy applicable federal guidelines and to satisfy the more
restrictive definition of “charitable activities” currently imposed in Illinois by the Department of Revenue.
For organizations intending to operate or transfer funds to advance charitable activities in one or more
foreign countries, the corporation might also include an affirmative statement in Article 5 that all
distributions shall be made in full accordance with the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act), Pub.L.
107-56, 115 Stat. 272 (or a corresponding provision of any future federal or state law concerning
antiterrorism). This will put future directors, government agencies, and potential funding organizations on
notice of the antiterrorism laws that affect the organization.
Incorporators — Name and Address
Article 6 of the articles of incorporation identifies the incorporators as the persons who sign the
articles of incorporation and swear to the truthfulness of the information therein. Section 102.05 of the
General Not For Profit Corporation Act requires no more than the signature of a single person who is 18
years of age. 805 ILCS 105/102.05. The incorporator need not be a resident of Illinois nor a resident or
citizen of the United States. Many organizations will nevertheless designate several incorporators for
symbolic reasons. Usually, one of the founders will sign the articles and give his or her personal address
as the return address. The return address need not be a residence as in the case of the initial directors; it is
often that of the lawyer. Legal counsel may act as the incorporator when founders want to expedite the
incorporation process and forego the time spent obtaining signatures.
A domestic or foreign corporation may be the incorporator. In that case, the articles must be signed by
the president (or vice president) of the corporation, and they must be verified and attested to by the
corporate secretary (or assistant secretary).
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