Mission accomplished. Our needs have changed. We are not sustainable. Our efforts are better served elsewhere. There can be many reasons behind the dissolution of a nonprofit organization, but one thing is a given: from logistics to community impact, closing operations takes time and care. While there are variances from state to state, we have outlined the basic steps to help you understand the process and be ready if the time comes.
Step 1: It Starts at the Top
Long before filing any paperwork, if winding down the nonprofit is on the table, the board of directors must carefully examine the organization, its bylaws, and operations, and begin to prepare a strategy that will ultimately become a formal “plan of dissolution” (see step #2). The board of directors must first reach a consensus that dissolution is the correct path to take and pass a resolution to pursue this course of action. The resolution may be passed at a board meeting with the vote on the resolution recorded in the board meeting’s minutes or by unanimous written consent. Note that organizations with a membership need membership approval to dissolve.
Once the resolution has passed, the wheels are officially set in motion (although the vote to dissolve may be rescinded at any time prior to filing the dissolution documents with its state corporations office). Board members should understand that winding down operations is often a lengthy process and some of the board may be obligated to remain in place to facilitate the dissolution for several months after the cessation of operations to file reports and complete other corporate actions.
Step 2: The Plan
Once a nonprofit’s leadership determines that closure is the best option, the “plan of dissolution” is drafted. This plan identifies the nonprofit organization’s outstanding liabilities and remaining assets and outlines how the nonprofit organization intends to address and distribute these, respectively. Responsible parties and timelines should also be noted in this document, to best maintain accountability.
Federal and many states’ laws require that a dissolving 501(c)(3) organization’s remaining assets (tangible or intangible) be distributed to one or more other 501(c)(3) organizations with a purpose similar to the dissolving nonprofit. Distributees must honor any restrictions on the assets they receive. Assets cannot be given to individuals, such as board members or even volunteers, but they can be sold for fair market value with the cash distributed to one or more other 501(c)(3) organizations. To ensure the transfer runs smoothly, the board will want to create an inventory of assets, which may be reported on Schedule N of the IRS 990 form. Prior to transferring any assets, the organization must carefully follow its state’s notification requirements (see step #4). In many states, the distributees must be identified in the plan of dissolution.
Step 3: Payment of Liabilities
The board must next develop a plan for payment of its liabilities, which may involve the sale of assets to free up cash. The dissolved nonprofit organization’s final financial statements should reflect no further liabilities or assets.
Step 4: Regulatory Consent
After filing the Plan of Dissolution with their respective state, the nonprofit’s board may need to inform one or more state agencies that their organization intends to dissolve. Each state’s requirements are different, but most require that the organization obtain clearance from its state charity regulator before distributing its assets and dissolving. This process requires providing formal notice to the charity regulator with detailed information regarding the organization and the intended recipients of its assets.
Step 5: Distribution of Assets and Completion of Distribution
Once regulatory clearance has been received, the organization may distribute its remaining assets pursuant to its plan of distribution. Once that it is done, it should file the final certificates or other documents confirming dissolution with the appropriate state agencies to formally dissolve. However, formal dissolution does not formally terminate the corporation’s and board’s obligations until all steps to the winddown are completed.
In addition to notifying state regulators, the organization must inform the IRS of its dissolution by filing a final IRS 990 series form. This form is due within 4 months and 15 days of the nonprofit’s last full fiscal year, or it can be submitted at any time during the year once all state dissolution requirements are completed.
Many details must be considered with the dissolution of an organization. If you are evaluating this option for your nonprofit, the Law Firm for Nonprofits can help you successfully navigate the process. Contact us to learn more or to schedule a consultation.