The philosophy that drives nonprofit corporations is to effect positive change for educational, civil, religious, social or charitable causes. Inevitably for some not-for-profits, satisfying the original goals of the corporation becomes more and more challenging due to financial difficulties and other reasons. These reasons may not always be clearly defined and from time to time it may be necessary to ask the tough questions in evaluating if your nonprofit corporation should be dissolved.
Reasons for dissolving nonprofit organizations
Can your non-profit support itself financially?
Are unpaid debts mounting with no end in sight? Are contributions virtually nil? If your nonprofit corporation has been sustained by a handful of contributions, it may be time to review other feasible financial options. If fundraising possibilities are slim, it may be time to consider corporate dissolution.
Is the competition fierce?
Do you have a not-for-profit for helping stray animals and two other companies in the same town of 1500 people are doing the same thing? You may be vying for government funding and revenue for your cause while Bob and Cindy down the block are beating the same drum. If joining forces isn't a viable option, closing your doors and ceasing duplicate efforts may make sense.
Has your nonprofit organization's reputation been tainted?
Embezzling and mismanagement add up to disaster for a nonprofit corporation. While you think something like this may never happen within your nonprofit, you might be surprised how often it does happen. Public relations efforts can be stepped up to redeem the positive image your nonprofit entity once maintained. Some organizations successfully recover while others may continue a downward spiral making dissolution your best option.
Are you still helping your intended audience?
You may have originally formed your nonprofit corporation to help homeless individuals in your town. Now your local government has built numerous apartment buildings specifically to support these same individuals. Ideally, there are no individuals on the street anymore, but your not-for-profit's purpose may no longer be relevant. You may decide to repurpose your nonprofit corporation's mission or dissolve your corporation and start a new venture.
How to dissolve your nonprofit corporation
The dissolution of a nonprofit corporation requires compliance with the state nonprofit corporation law under which it was organized. State laws differ.
However, in general, dissolution of a nonprofit corporation begins with the board of directors (or whatever the governing body is called) resolving to dissolve and drafting a plan of dissolution. The statute may prescribe what the plan has to set forth, but it will basically detail the dissolution process, including how the assets will be distributed and the liabilities discharged.
If the nonprofit has voting members, the members will have to approve. In some states, dissolution can be approved by the consent of all the members without board action. The vote required by the directors or members should be set forth in the bylaws, or if not, the statutory default rule governs.
After dissolution is approved the nonprofit corporation continues to exist solely to wind up its affairs, liquidate its assets, and distribute any remaining assets. The winding-up period includes, among other steps –
- withdrawing from the states where the nonprofit corporation was qualified to do business
- canceling licenses and registrations
- notifying creditors, employees, clients, and donors.
If it is a 501(c) (3) organization, it is required by federal tax law to distribute its remaining assets for tax-exempt status purposes — such as by distributing the assets to another 501(c) (3) organization.
Articles of dissolution must be filed with the formation state for dissolution to be effective. Depending upon the state, this filing may be made any time after dissolution is approved, or it may have to be made after the winding up and distribution of assets is completed.
The nonprofit may also be required to file a tax clearance certificate. This is a certificate from the state tax department stating that the nonprofit corporation does not owe the state any taxes or reports. Some states require notification of, or approval by, other state officials such as the attorney general.
A 501(c) (3) organization must notify the IRS of its dissolution by filing IRS Form 990. Certain documents have to be attached such as the articles of dissolution and plan of dissolution.
Closing the doors of any nonprofit is never easy after you have poured your heart and soul into its success. Careful consideration is recommended in making the decision to dissolve by seeking the advice of an attorney or accountant. BizFilings is available to professionally assist you if you decide dissolution is your best option.