How to dissolve a nonprofit organization

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. Although state laws differ, here are some general steps to dissolving your nonprofit organization.

Board approval and plan of dissolution

In general, dissolution of a nonprofit corporation begins with the board of directors (or whatever the governing body is called) resolving to dissolve and then drafting a plan of dissolution. The statute may prescribe what the plan must set forth, but it will basically detail the dissolution process, including how the assets will be distributed and the liabilities discharged.

If your nonprofit 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.

Check your nonprofit’s articles of incorporation/certificate of incorporation and local laws to ensure you check all the right boxes for dissolution.

If the nonprofit has voting members, the members will have to approve the dissolution. 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.

Approval from the state Attorney General

Formally dissolving your nonprofit organization can involve multiple steps. Some states require notification of, or approval by, other state officials such as the attorney general. In such instances, you may need to file a petition to dissolve your nonprofit or gain approval for any dissolution plan.

Contact your attorney general or applicable state office to find out what requirements they impose for a nonprofit dissolution plan. They may also be able to provide sample plans.

Dissolving the business entity

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.

Your nonprofit may also be required to file a tax clearance certificate. This is a certificate from the state tax department stating that your nonprofit corporation does not owe the state any taxes or reports.
You will also need to withdraw from the states where your nonprofit corporation was qualified to do business.

Notify the IRS

As a 501(c)(3) tax-exempt organization, you 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.

If you have an Employee Identification Number (EIN), did not file for tax-exempt status, and are not required to file an annual tax return or notice, you only need to notify the IRS Exempt Organization Entity division. This letter should state that you are terminating your nonprofit’s activities and wish to close your account.

Asset distribution

Determine how the organization's remaining assets will be distributed. Typically, nonprofit assets must be used for charitable purposes or transferred to another tax-exempt nonprofit organization. Consult with an attorney or accountant to ensure compliance with tax and legal requirements for asset distribution.

Additional steps and considerations

The winding-up period for a nonprofit organization also includes, among other steps:

• Canceling state and local licenses and registrations.
• Canceling insurance.
• Notifying creditors, employees, clients, vendors, and donors.

If you are terminating leases and/or contracts, refer to your contract documents to determine how non-renewal or termination of a contract should be handled as well as how much notice is required.

Related article: Nonprofit organizational changes & state amendment filings

Conclusion

Closing the doors of any nonprofit is never easy, especially 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.

FAQs:

What is a 501(c)? A 501(c) is a reference to a specific section of the United States Internal Revenue Code (IRC) that provides tax-exempt status to various types of nonprofit organizations. The full term is "501(c)(3)," and it is the most common type of tax-exempt organization in the United States.

Related article: How to file a 501(c)(3) tax exempt non-profit organization

What is the process of dissolving a nonprofit organization?
The process typically involves passing a board resolution, notifying government agencies, settling debts, distributing assets, filing final tax returns, and canceling registrations. Specific steps may vary depending on local laws and the organization's structure.

Do we need board approval to dissolve the nonprofit?
Yes, in most cases, the board of directors must pass a resolution to initiate the dissolution process. This resolution should be documented in the meeting minutes.

Can a nonprofit dissolve if it is still in debt?
Yes, but the organization must settle its debts before distributing any remaining assets. Addressing financial obligations is a critical step in the dissolution process.

How long does the dissolution process take?
The timeline varies depending on the complexity of the organization, outstanding obligations, and government processing times. It could take several months to complete all necessary steps.