Q&A #127 – What happens when an organization’s nonprofit corporation status is revoked?
Question: My nonprofit organization recently received a letter from our state indicating that our nonprofit corporation status has been revoked. What does this mean, and does this impact our 501(c)(3) status?
Answer: Revocation of an organization’s status as a “nonprofit corporation,” which is often called “administrative dissolution” or “termination,” has numerous consequences that warrant immediate attention, but this is separate and distinct from revocation of federal tax-exempt status. Thus, revocation of an organization’s nonprofit corporation status does not mean that its 501(c)(3) status has been revoked.
Nonprofit corporation status is important because it ensures a strong degree of liability protection for the organization’s Directors, Officers, volunteers, and others, and provides a solid framework for good governance and accepted best practices. Consequently, it is important to maintain an organization’s status as a nonprofit (or, in some states, “non-stock”) corporation in “good standing” in the state of incorporation and in any states where the organization operates and is registered as a “foreign corporation.”
In most cases, revocation of nonprofit corporation status (i.e., failure to maintain “good standing” in the state) happens due to a failure to timely submit the corporation reports (or in some states, tax filings) required by the applicable states. In most states these reports are due every year, but some states requiring filing every two years or less often.
Revocation is usually easily rectified by filing the required reinstatement paperwork and paying a small late filing penalty. However, neglecting to address the situation can have significant consequences.
First, revocation of nonprofit corporation status can expose the organization’s Directors, Officers, volunteers, and others to personal liability risks. The liability protection that is conferred by the state nonprofit corporation statute is lost while the organization is not in “good standing.”
Second, in many states a corporation that is not in good standing cannot bring a lawsuit in the courts of that state. This can be very significant in the event an organization needs to sue to enforce its rights under a contract, for example, especially if the contract requires disputes to be litigated in the courts of a specific state.
And there may be other consequences such as fines, disruption of insurance coverage, breach of contracts and grant agreements, and potential loss of rights to use the organization’s name in the state.
Planning Tip – Revocation of nonprofit corporation status and other failures to keep up with annual filings often happens due to lost or misdirected correspondence from the government, as is common when an organization has had turnover among its Board member or staff or fails to update its address in the appropriate state database. For this reason, organizations should periodically search the relevant state websites to verify that the organization remains properly registered and in good standing and that its contact information is accurate and up to date.
While revocation of nonprofit corporation status does not mean that the organization is no longer a 501(c)(3) organization, this is nonetheless a serious issue that should be addressed as soon as possible.
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