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Nonprofit Versus Tax-Exempt In Illinois, What’s The Difference?

Updated on
October 29, 2020
Article written by
Attorney Kevin O'Flaherty

In this article, we discuss the difference between a not-for-profit organization and tax-exempt status in Illinois and answer the following questions:


  • What Is A Nonprofit Organization?
  • What Does It Mean To Be Tax-Exempt?
  • What Are Some Differences Between A For-Profit And Nonprofit Organization?


“Nonprofit” and “tax-exempt” are commonly used interchangeably when discussing charitable organizations, but they are not the same thing. A nonprofit organization may enjoy certain tax exemptions, but that does not mean all tax-exempt organizations are nonprofit. Those considering organizing a company as a nonprofit or seeking tax-exempt status should strongly consider seeking legal help when drafting their Articles Of Incorporation.


What Is A Nonprofit Organization?


Nonprofits are created with a specific public purpose in mind, versus being focused on providing a financial benefit to those involved. A nonprofit might be started that focuses on research to find a cure for a certain disease, improving the socio economic situation for a group of people, or rescuing animals from the leftovers of a national disaster. Many nonprofits are created knowing that once a goal is achieved, the company will be dissolved, and still many more exist to support ongoing initiatives that evolve over time.


A common misconception is that a nonprofit can operate without actually turning a profit. While many nonprofits don’t provide a service that generates significant income, they must still have funds coming in from somewhere in order to pay their operating expenses. Much of this income is generated through donations, speaking engagements and paid outreach within the community. Any actual profit generated by the organization must be reinvested in some manner back into the company.


Nonprofits have different benefits that vary state by state, including any tax-exemptions. These benefits are exclusive to the given state in which the organization is registered and any organization that operates across state lines must obtain the proper licenses, permits, etc, and meet the requirements for a nonprofit in each state.

 

What Does It Mean To Be Tax-Exempt?

 

Tax-exempt designates a specific exemption from federal and state income tax, but could also refer to other types of taxes, such as state sales tax and property tax. In order to be tax-exempt, an organization must meet certain requirements and then certify for tax-exempt status. This process typically involves recertifying, or at least keeping up with certain procedures such as filing an annual report, regular board meetings, etc.

 

Generally, a tax-exempt entity does not have to pay corporate income taxes on the income it generates, and anyone who donates to these organizations (501(c)(3)) can deduct their donation on their taxes. Becoming a nonprofit doesn’t automatically gain an organization exemption from federal or state income tax. The company must first satisfy the requirements for that state and the rules set forth in the Internal Revenue Code. Except for churches, nonprofits must also apply for tax-exempt status through both the IRS and the state in which they operate.

 

Once an organization receives tax-exempt status it doesn’t give them the green light to do anything and have it fall under the umbrella of tax-exempt. Their records will be closely scrutinized by the IRS and any profit-generating activities that are not in line with the mission statement of the nonprofit may be subject to federal income tax. If you’re considering setting up a nonprofit organization, we highly suggest obtaining the proper legal help to ensure a smooth certification process.

 

What Are Some Differences Between A For Profit And A Nonprofit?

 

If your not sure what kind of organization you should create, or your wondering if your current company would operate better as a nonprofit, consider some of these key differences between a for profit and nonprofit company:

 

Most nonprofits:

 

  • Most be classified as a nonprofit or trust;
  • Are not owned by a single individual or group;
  • They are managed by a board of directors, consisting of 3 or more unrelated individuals;
  • Created solely for charitable, religious, scientific, educational or literary reasons

 

Most for profits:

 

  • A created to generate profit for the owners;
  • Are organized at an LLC, sole proprietorship, partnership, or corporation;
  • Are owned by the creators of the business or a family member of the creator(s);
  • The business is managed by the owners and may have stockholders

Nonprofit Versus Tax-Exempt In Illinois, What’s The Difference?
Author

Attorney Kevin O'Flaherty

Kevin O’Flaherty is a graduate of the University of Iowa and Chicago-Kent College of Law. He has experience in litigation, estate planning, bankruptcy, real estate, and comprehensive business representation.

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