Compliance for Churches and Non-Profits in Illinois
Operating a church or non-profit organization in Illinois is a meaningful way to serve communities, support charitable causes, and advance missions of faith or public benefit. However, alongside the spiritual or humanitarian vision, these organizations must also navigate a wide array of legal and regulatory responsibilities. Maintaining compliance is not simply a matter of following rules for their own sake; it protects the organization’s tax-exempt status, financial integrity, and public trust. In Illinois, churches and non-profits face specific requirements at the federal, state, and local levels.
This article explores those obligations and highlights best practices to help churches and non-profits remain in good standing. For help maintaining your Chicago area church or non-profit in compliance with applicable laws, contact MacDonald, Lee & Senechalle, Ltd., to speak with an experienced Chicagoland church and non-profit lawyer.
Federal Compliance: Maintaining 501(c)(3) Status
Many Illinois churches and non-profits operate under Section 501(c)(3) of the Internal Revenue Code, which grants federal tax-exempt status. This designation comes with substantial benefits, including exemption from federal income tax and the ability to receive tax-deductible charitable contributions. However, it also brings a set of regulatory responsibilities.
To preserve 501(c)(3) status, organizations must operate exclusively for religious, charitable, educational, or other qualifying purposes. They must ensure that none of their earnings benefit private individuals or shareholders and must avoid engaging in prohibited political activities. While churches are automatically considered tax-exempt and are not required to apply for recognition, many still choose to file Form 1023 with the IRS to obtain a formal determination letter, which can enhance transparency and donor confidence.
Once tax-exempt status is granted, most non-profits (except churches and some religious organizations) are required to file annual information returns, typically Form 990, 990-EZ, or 990-N depending on the organization’s revenue. Filing a late or incomplete return—or failing to file for three consecutive years—can result in automatic revocation of tax-exempt status. Although churches are generally exempt from filing these annual returns, other types of religious or faith-based organizations, such as ministries or outreach programs that are not classified as churches, might not be exempt and should seek legal guidance to determine their obligations.
State Compliance: Illinois Regulatory Requirements
In addition to federal requirements, churches and non-profits in Illinois must comply with a range of state laws. Most non-profits are formed by filing Articles of Incorporation with the Illinois Secretary of State and must follow the Illinois General Not For Profit Corporation Act. While churches might not be required to incorporate under state law, incorporation can provide legal protections and structural clarity, especially for property ownership and liability issues.
Once incorporated, organizations must file an Annual Report with the Secretary of State to maintain active status. The report must include updated information about the organization’s officers and registered agent. Failure to file the annual report can lead to administrative dissolution of the entity.
Non-profits soliciting charitable contributions in Illinois are also subject to oversight by the Illinois Attorney General’s Charitable Trust Bureau. Registration is required under the Illinois Charitable Trust Act and the Solicitation for Charity Act. Most organizations must file an initial registration (Form CO-1) along with supporting documents, including the IRS determination letter and Articles of Incorporation. Annual financial reports, typically submitted on Form AG990-IL, must be filed each year within six months of the end of the fiscal year. These filings allow the public and state regulators to monitor charitable spending and fundraising practices.
Certain exemptions from charitable trust registration exist, including religious organizations that solicit funds solely for religious purposes. However, the lines can blur, and it’s important for church-affiliated non-profits to evaluate whether their activities fall within the exemption or require registration.
Employment and Tax Responsibilities
Churches and non-profits with employees must comply with applicable employment and tax laws. This includes properly classifying workers as employees or independent contractors, withholding payroll taxes, and complying with wage and hour laws. Although religious organizations may be exempt from some provisions of federal and state employment law—such as Title VII’s prohibition on religious discrimination—these exemptions are limited and do not apply to all aspects of employment regulation.
Organizations must register with the Illinois Department of Revenue to remit state income tax withholdings and may need to obtain an Illinois Unemployment Insurance account if they are not exempt. Churches are often exempt from unemployment taxes for ministers and certain employees, but must affirmatively claim that exemption and understand its scope. Even volunteers can trigger employment law issues that should be carefully addressed to maintain legal compliance.
Property tax exemption is another area where compliance is critical. Religious organizations may qualify for exemption from local property taxes under Illinois law, but the exemption is not automatic. The organization must apply to the local county board of review and the Illinois Department of Revenue. Any changes in the use of the property or its ownership status must be reported to avoid jeopardizing the exemption.
Financial Oversight and Governance
Strong internal governance is essential for legal compliance and organizational health. Non-profit boards must understand their fiduciary duties, which include the duties of care, loyalty, and obedience. These duties require board members to act in the best interests of the organization, avoid conflicts of interest, and ensure that the organization’s activities align with its mission and legal obligations.
Implementing financial controls—such as requiring dual signatures on checks, regular financial reporting, and independent audits—can help prevent fraud and mismanagement. Even churches, which may rely heavily on volunteer labor and informal oversight, benefit from structured financial procedures that promote accountability and transparency.
Illinois law does not require non-profits to conduct annual audits unless they receive significant state or federal funding. However, many organizations choose to conduct voluntary audits or reviews to satisfy board members, donors, or grant-makers.
Local Zoning and Permitting Issues
For churches and non-profits operating physical facilities, local zoning ordinances must also be considered. In Chicago and other municipalities throughout Illinois, zoning codes regulate land use, including where religious assemblies and charitable services may operate. While federal law, including the Religious Land Use and Institutionalized Persons Act (RLUIPA), protects churches from discriminatory land use restrictions, these protections are not absolute.
Before purchasing or leasing property, churches and non-profits should verify that their intended use is permitted under local zoning laws. They may also need occupancy permits, health department approvals (if serving food), or special use permits for outreach events or community programs.
Recordkeeping and Document Retention
Maintaining accurate and organized records is an often-overlooked aspect of compliance. Illinois law and IRS guidelines recommend that non-profits retain key documents for set periods. For example, governing documents such as articles of incorporation and bylaws should be retained permanently. Financial statements, tax returns, and employment records should be kept for at least seven years.
Churches and non-profits should develop a document retention policy that outlines how long records are maintained and how they are disposed of. This policy should cover both physical and electronic records and reflect compliance with privacy laws and donor confidentiality.
Common Compliance Pitfalls
Despite the best intentions, churches and non-profits may stumble into compliance issues due to misunderstandings or administrative oversight. Common pitfalls include:
- Failing to file annual reports with the Secretary of State.
- Missing IRS filing deadlines or assuming exemption from Form 990 requirements.
- Misclassifying employees as contractors.
- Commingling personal and organizational funds.
- Soliciting donations without registering with the Illinois Attorney General.
Each of these missteps can expose the organization to penalties, loss of tax-exempt status, or reputational harm. A proactive compliance strategy can prevent these issues and ensure the organization stays mission-focused.
Ongoing Compliance as a Culture
Compliance should not be treated as a one-time task or a box to check during formation. Rather, it should become a part of the organization’s culture. Training board members and staff on legal responsibilities, creating clear policies and procedures, and conducting regular reviews can help instill a compliance mindset. Legal counsel familiar with the unique needs of religious and charitable organizations can provide invaluable guidance and help churches and non-profits stay up to date with evolving laws and best practices.
Contact MacDonald, Lee & Senechalle, Ltd. in Hoffman Estates and Des Plaines
By making compliance a priority, religious and charitable organizations not only preserve their legal standing and tax benefits—they also reinforce their integrity, safeguard donor confidence, and strengthen their ability to serve their communities for generations to come.
MacDonald, Lee & Senechalle, Ltd. provides experienced counsel to churches and non-profits throughout the Chicago area, helping them navigate compliance challenges with confidence and clarity. Contact us at our offices in Hoffman Estates (847-310-0025) or Des Plaines (847-298-5030) to make sure your church or non-profit is operating as it should.
