Deciding to dissolve a nonprofit corporation is never easy, but sometimes it’s the best course of action. Whether your organization has achieved its purpose, struggles with financial viability, or faces other challenges, it’s crucial to understand the dissolution process. This step-by-step guide on how to dissolve a nonprofit corporation is designed to help you navigate the complexities of dissolving a nonprofit, ensuring compliance with legal requirements and protecting the interests of all involved parties.
Dissolving a Nonprofit Corporation
When a nonprofit corporation reaches the end of its lifecycle, whether due to mission fulfillment, financial challenges, or other factors, the organization must take specific steps to formally dissolve. The dissolution process involves more than just closing the doors; it requires a series of legal and administrative actions to properly wind down operations, distribute remaining assets, and notify relevant parties. In this guide, we will break down the key components of dissolving a nonprofit corporation, providing actionable advice and best practices to help ensure a compliant and efficient dissolution.
Step 1: Board of Directors’ Resolution
The first step in dissolving a nonprofit corporation is to obtain approval from the board of directors. The board of directors must reach a consensus and take an official corporate action, typically in the form of a vote documented in the meeting minutes, to affirm that dissolution is the appropriate course of action.
Before voting, the board should thoroughly discuss the reasons for dissolution and consider alternative options, such as reorganizing through bankruptcy or merging with another nonprofit.
The board should also review the organization’s articles of incorporation and bylaws to ensure compliance with any specific dissolution procedures outlined in these documents.
Once the board has decided to dissolve the nonprofit, it should draft a “plan of dissolution.” This plan is a written description of how the nonprofit intends to distribute its remaining assets and address its remaining liabilities, which we will go into in further detail below.
Here are some tips to keep in mind during this stage:
- Ensure that the minimum number of board members required by the bylaws remain in place to help with the dissolution process, as it may take several months after operations have ceased.
- Establish a timeline and assign responsibilities to maintain accountability throughout the dissolution process.
- Designate a spokesperson and develop key talking points to ensure consistent communication with the community, employees, volunteers, and other stakeholders.
Step 2: Draft Dissolution Documents
After the board has approved the plan of dissolution, the next step is to draft the official dissolution documents. These documents, often referred to as “articles of dissolution” or a “certificate of dissolution,” will be filed with the state agency responsible for corporate registrations.
Some states may provide a template or form for the plan of dissolution, while others may require additional steps, such as filing a petition in court or seeking approval from the state attorney general. It is essential to research and follow the specific procedures required by your state of incorporation.
The plan of dissolution should include a comprehensive inventory of assets and liabilities, a description of how liabilities will be satisfied, the names of the nonprofits that will receive the remaining assets, and the fair market value of those assets. This information will also be necessary when filing the final IRS Form 990 and Schedule N, which we will outline below.
Step 3: Notify Stakeholders
Once the board has approved the dissolution and the necessary documents have been drafted, it is crucial to notify all stakeholders of the nonprofit’s intention to dissolve. Stakeholders may include members, donors, volunteers, employees, clients, vendors, and the general public.
Communication should be transparent and timely, providing stakeholders with a clear understanding of the reasons for dissolution, the timeline for the process, and how it will impact them. The board should also be prepared to address questions and concerns from stakeholders, as the decision to dissolve can be emotional and may require adjustments for those closely involved with the organization.
Here are some of the best practices you can implement during this stage:
- Develop a communication plan that outlines key messages, communication channels, and timelines for notifying different stakeholder groups.
- Provide employees with information about their last day of work, severance pay (if applicable), and eligibility for unemployment compensation.
- Notify clients and beneficiaries of the nonprofit’s services as early as possible to allow them to make alternative arrangements.
- Inform donors about the dissolution and provide them with gift acknowledgments for the time period prior to closure.
Step 4: Settle Liabilities and Obligations
Before distributing any remaining assets, the nonprofit must settle all outstanding liabilities and obligations. This process involves identifying all debts, taxes, and future contractual obligations, and developing a plan to pay off or terminate these liabilities.
The nonprofit should review all contracts, leases, and agreements to determine the appropriate steps for non-renewal or termination, including any required notice periods and potential penalties for early termination. If the organization is unable to satisfy its debts and has insufficient remaining assets, filing for bankruptcy may be the best option.
Step 5: Distribute Remaining Assets
After settling all liabilities, the nonprofit must distribute its remaining assets in accordance with federal and state laws, the organization’s bylaws, and the plan of dissolution. Federal law requires that a dissolving 501(c)(3) organization distribute its assets only to other tax-exempt organizations or government entities for public purposes.
The nonprofit should create an inventory of all remaining assets, including cash, property, and intangible assets such as intellectual property or data. Some assets may require appraisals or valuations to determine their fair market value. The organization should document all asset transfers and sales, ensuring that transfers are made only to qualified tax-exempt organizations or government entities.
Here are a few key considerations to keep in mind when distributing nonprofit assets:
- Consult with legal professionals to ensure that asset distribution complies with all applicable laws and regulations.
- Obtain written acknowledgment from recipient organizations confirming their tax-exempt status and receipt of the assets.
- Keep detailed records of all asset transfers, including the description of the assets, their fair market value, and the recipient organization’s information.
Step 6: Notify the IRS and State Agencies
After distributing the remaining assets, the nonprofit must notify the Internal Revenue Service (IRS) as well as applicable state agencies of its dissolution. This includes filing the final IRS Form 990 and Schedule N as well as notify state agencies such as the attorney general’s office, the secretary of state, and any departments that have licensed or regulated the nonprofit’s activities.
The agency you notify will depend on the state your nonprofit is located in.
The final IRS Form 990 should be filed within 5 months and 15 days after the last day of the organization’s most recently completed fiscal year. If the nonprofit closes mid-year, it can file the form as soon as it has completed all state dissolution requirements. The form should indicate that it is the final return and include Schedule N, which details the distribution of remaining assets.
Conclusion
Dissolving a nonprofit corporation is a complex process that requires careful planning, attention to detail, and compliance with various legal and regulatory requirements. By following the steps outlined in this guide and seeking guidance from legal and accounting professionals, nonprofits can ensure a smooth and orderly dissolution process.
Throughout the dissolution process, it is essential to maintain transparency, communicate effectively with stakeholders, and prioritize the responsible distribution of remaining assets to support the continuation of the nonprofit’s mission through other organizations.
While dissolving a nonprofit can be an emotional and challenging experience, taking the necessary steps to wind down operations properly will help protect the legacy of the organization and the interests of all those involved.
Frequently Asked Questions
How do I terminate a non-profit with the IRS?
To terminate a nonprofit with the IRS, you must file a final IRS Form 990, indicating that it is the last return and including Schedule N, which details the distribution of remaining assets. The form should be filed within 5 months and 15 days after the end of the organization’s last fiscal year.
What happens to the money when a nonprofit dissolves?
When a nonprofit dissolves, any remaining assets must be distributed to other tax-exempt organizations or government entities for public purposes, in accordance with federal and state laws, the organization’s bylaws, and the plan of dissolution.
How do I remove myself from a non profit board?
To remove yourself from a nonprofit board, submit a written resignation letter to the board chair or secretary, following any procedures outlined in the organization’s bylaws. It is essential to fulfill any remaining obligations and assist with the transition process as needed.
How do I lose my nonprofit status?
A nonprofit can lose its tax-exempt status if it fails to comply with IRS regulations, such as filing annual returns (Form 990), engaging in excessive lobbying or political activities, or conducting activities unrelated to its exempt purpose. Failing to dissolve properly can also lead to the loss of tax-exempt status.