Navigating the Nonprofit Dissolution Process
It is relatively common knowledge that dissolving a nonprofit organization is one of the most difficult decisions a Board of Directors may have to make. However, many people underestimate the careful planning, attention to detail, and commitment that is required to properly shut down and dissolve an organization. This process should start well before the filing of “Articles of Dissolution” and often continues in a post-dissolution “wind-up” period that can last for months or years.
The process of shutting down a nonprofit organization typically begins with a decision by the Board of Directors that dissolution is appropriate and that other alternatives (renewed efforts to generate revenue, changes to the organization’s programs, merging with an existing organization) would not be sufficient to address the challenges or circumstances that led to the decision. This first step represents a decision to start planning for eventual dissolution, as distinguished from the formal Board authorization to dissolve that happens toward the end of the process. The entire process can often take a year or more. Be aware that dissolving an organization can draw increased scrutiny from state regulators and the general public (especially if the organization is well-known), so the Board’s decision-making process should be meticulously documented.
The organization will then need to start planning for the reduction and eventual closure of its main programs and activities, including an assessment of its staffing needs through the course of the dissolution process. The organization should be transparent with staff, constituents, and the community it serves about the organization’s plans, so as to minimize the disruption on these people’s lives as much as possible. In addition to being the right thing to do, advance notice to employees may be required under the federal WARN Act and/or analogous state laws. If the organization desires to pay severance to the employees who will lose their jobs, this will need to be factored into the organization’s financial plans (while being mindful of federal excess benefit transaction rules that prohibit paying more than reasonable compensation to “disqualified persons” including certain top management employees).
If the organization is registered in multiple states under state charitable solicitation registration laws and/or as a “foreign corporation” that does business in the state, it will generally want to close out many or most of these registrations as its operational footprint shrinks with the closure of programs and cessation of fundraising efforts. The process and requirements for withdrawing these registrations differs depending on the state and may require substantial research.
Next, the organization will need to review its existing commitments and contracts with funders, vendors, lessors, etc. It is important to maintain open lines of communications in the event shutting down requires the organization to terminate these arrangements. Pay close attention to the termination language in any active contracts, as there may be notice periods or liabilities that impact the organization’s dissolution plans. For organizations with substantial debts that cannot be paid, the bankruptcy process may be necessary.
Managing the organization’s remaining assets will also require substantial planning. Some assets may need to be liquidated or sold, which can require considerable time and effort and may require notification and/or approval by the Office of the Attorney General in the applicable state. An organization must also carefully assess any funds that are subject to donor or grantor restrictions. If the organization is not able to expend these funds in a manner consistent with the restriction, then an organization must generally obtain explicit donor or grantor to modify the restriction, or alternatively seek court approval. Be careful to distinguish between donor/grantor restricted funds and “Board-designated funds,” as the latter can be easily modified by action of the Board.
Organizations should then determine what services it may need for the “wind-up” period following formal dissolution and arrange to prepay as many of these expenses as possible. Common examples include document storage, registered agent services, tail insurance (which extends D&O insurance coverage for a certain period of time, often 3 to 5 years after dissolution), and the filing of the final Form 990. Be aware that Forms 990 must continue to be filed until all assets have been distributed and the bank account is closed out with a zero balance. The last Form 990 must show zero assets and will be marked as the “final return.”
It is usually at this point that an organization is ready to prepare a final “plan of dissolution” and obtain the formal authorization of the Board of Directors to dissolve. A “plan of dissolution” generally functions like a budget and action plan for the post-dissolution wind-up process, and should identify the organization’s remaining cash and non-cash asset, list any remaining expenses or liabilities, and name one or more nonprofit organizations to receive any assets that remain after all expenses and liabilities are resolved (if the dissolving nonprofit is a 501(c)(3) organization, then the recipient organization generally must be a 501(c)(3) public charity).
The plan of dissolution is typically included in the set of authorizing Board resolutions, which also include authorizing one or more officers or agents to file “Articles of Dissolution,” final Forms 990, and take any other steps needed to carry out the plan of dissolution. Approval of these resolutions is usually the final official act of the Board of Directors.
Planning Tip – A nonprofit organization that plans to shut down and file Articles of Dissolution should, with appropriate Board supervision, strive to close out its current commitments and pay as many remaining expenses as possible prior to adopting a final “plan of dissolution” and obtaining formal Board authorization to dissolve. This approach will simplify the state government filings required as part of the dissolution process and help to reduce the length of the post-dissolution “wind-up” period.
The organization will need to closely review state law requirements related to the dissolution process, as some states require that advance written notice be sent to the Office of the Attorney General and/or that a clearance be obtained from the relevant state tax departments to confirm that the organization does not owe taxes prior to dissolving. Once these requirements have been satisfied, the organization will file Articles of Dissolution in the state in which the organization incorporated.
The filing of Articles of Dissolution officially marks the point at which the organization exists only for the purposes of winding up its operations (rather than pursuing its mission), but it is not necessarily the last step in the dissolution process. It is common for authorized officers and agents to continue executing the plan of dissolution for a period of time until all expenses and liabilities have been resolved, the organization’s assets have been completely depleted, and the final Form 990 has been filed.
Lastly, it is often advisable (and in some cases may be required) for the organization to place an advertisement in a newspaper of general circulation notifying the public and potential creditors or other claimants that the organization has dissolved. This ensures that the statute of limitations on potential claims begins to run and mitigates the risk of unknown claimants appearing years later.
This overview of the dissolution process is intended to provide a framework to help Board members and management understand the basic steps of closing down and dissolving an organization. However, it is important to remember that circumstances and state and local laws vary, so nonprofits that are considering dissolution should seek counsel from a qualified attorney admitted to practice law in the relevant state.
