Nonprofit Dissolution: What Do You Need To Know

I work with clients across the whole lifecycle of a nonprofit. That means in one day, I may talk to a founder ready to turn their idea into a reality, a mid-sized org minimizing risk, and a nonprofit that has made the tough decision to dissolve.

Dissolution can be a happy occasion (yay, we accomplished our mission!) or it can be very sad and emotional. But no matter what brings a nonprofit to that point, the decision to dissolve is a big one. And, to the surprise of some folks, that decision is just the very beginning of what can be a very long process.

Can't we just close our bank accounts and call it a day?

No. If you really think about it, it makes sense why. The IRS and your state agencies have cared about what the nonprofit does from day one. They want to know where you get your money, how you spend it, and why you deserve to not pay income tax. They're definitely going to want to know why you're closing your doors and where any assets will be going after that. And as a nonprofit board member, you'll want to make sure to do this right. If the nonprofit isn't put to bed properly, you still have fiduciary duties to the org and can be personally liable for any lingering suits or charges.

So, what's the real process?

Proper dissolution is a multi-step process. There are several waiting periods involved. So, the first thing to know is that it's not quick.

For even a small to mid-sized organization with uncomplicated assets to dispose of, the process can take over 6 months to complete. For larger organizations with more restricted assets, real property, equipment, or government funding, the process can be even longer or at least more complicated.

The second thing to know – the dissolution process by nonprofits is generally dictated by state statute. That means that the requirements for nonprofits may vary by state, and there's no one universal process to follow. You'll want to get advice from a local attorney or consult your state's rules to make sure everything gets wrapped up properly.

That said, most dissolutions will likely follow a similar structure. I practice in Minnesota, and here's the general nonprofit dissolution process we follow:

1. Board Plan & Member Approval

The organization forms a plan for dissolution. This plan goes before the board of directors for a vote which is recorded in meeting minutes and a resolution adopting the plan. For nonprofits with voting  members, the board will submit resolution and plan for dissolution to the voting members for approval. The voting members exercise their right to vote and that is also recorded in meeting minutes. These records are important to show that the nonprofit followed all statutory requirements related to the decision to dissolve.

2. Notices to State Agencies

Next, the nonprofit must provide notice to the state agencies that govern nonprofits. In Minnesota, that's the Secretary of State and the Attorney General's Office.

Once the nonprofit notifies the Secretary of State of their intent to dissolve, all programming activity must stop. The only work allowed is the work required to wind up the nonprofit. The nonprofit provides a notice to the State Attorney General's Office who has the right to intervene in the dissolution if the agency believes it's necessary to protect charitable assets from being diverted to a private interest in violation of the law. The Attorney General's Office has 45 days to respond to the notice, or they can request 30 additional days to consider it.

3. Creditor Notice, Debt Collection and Settlement

The nonprofit may be owed certain payments and now is the time to collect on any outstanding accounts payable. At the same time, the nonprofit must directly notify any known creditors that it's going out of business. Plus, the nonprofit must publish a legal notice in a legal newspaper putting all creditors on notice of the impending dissolution. The public notice must run for four consecutive weeks in a paper in the county where the nonprofit's registered office is located. Once notified, creditors must be given 90 days to submit any claims against the nonprofit.

4. Transfer of Remaining Assets

Once the 45 day waiting period with the Attorney General's office has passed, the nonprofit can start selling, transferring or otherwise disposing of all the property and assets of the corporation. Asset transfer follows this priority order: 1) distribute any restricted assets in an appropriate manner; 2) pay costs and expenses of dissolution; 3) pay off debts; and finally 4) distribute any remaining assets to a nonprofit with a similar mission under the doctrine of si pre. This disposal process is also required in certain IRS regulations and it is likely there are requirements about asset distribution in the nonprofit's articles of incorporation or bylaws.

5. Close All Accounts

The organization will need to close all of its accounts with banks and other providers but also with website hosts, online software, apps, etc. If the nonprofit hired an attorney to help with the dissolution (which I highly recommend), all cash should be transferred to their escrow account when the bank accounts are closed. This ensures that charitable assets are stewarded by a fiduciary and not put into a private party's bank account. Any final payments due from the corporation to creditors can be handled from the law firm trust account by the attorney, and a final disbursement to the successor organization will close it all out.

6. File Articles of Dissolution

This is a detailed document that outlines how the plan of dissolution was followed and documents that all required notice procedures were followed. These articles are filed with the Secretary of State. The dissolution is complete upon filing the articles or on the date stated in the articles as allowed by the statute. A certificate of dissolution is produced by the Secretary of State which verifies the dissolution is complete.

7. File Final IRS Tax Return and Reports

But wait, there's more! The nonprofit will have to file final reports including a final Form 990 return with the IRS. This is often a partial year or "stub year" return, but still must be filed to notify the IRS the organization is dissolved. If the nonprofit had requirements to file reports annually with a state agency for charitable solicitation registration, a final report must be submitted. Likewise, there may be other final reports for sales tax accounts, unemployment accounts, and others. Working with a CPA competent in nonprofit corporations is key for this final phase.

Is that all!?

That's it! It's a long list, right? And if you add in the emotional weight that usually comes with dissolving a nonprofit, I can tell you it's not always an easy process. While it's possible for an organization to go through it alone, it's much easier to have an experienced lawyer help you through it. The lawyer can carry some of the burden and act as project manager for the dissolution. Your attorney can smooth the transition with vendors who may be angry about losing out on future rent or other financial consequences, strategize a public relations plan, and hold funds in escrow to allow you to wind things up quickly and properly.

Considering dissolving a nonprofit you care for? Check out my Nonprofit Dissolution Session to get the help you need.

Jess Birken is the owner of Birken Law Office, a firm designed to help nonprofits. Ideal Client Engagements are nonprofits looking for a strategic partner who will give pragmatic advice and keep business operations on track so the mission work stays a priority.

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