Charitable organizations exist for all sorts of purposes. But each year, many of them must dissolve. Whether they dissolve because their mission is accomplished, or because they no longer have the funding to pursue their goals, or for whatever reasons the dissolution decision is made, there is a strict formula they must follow.
In certain ways, it is similar to the way a for-profit company dissolves; but there are additional factors involved. A nonprofit’s bylaws or articles of incorporation should include references about the dissolution process, and these require following.
However, many smaller nonprofits may not have included such instructions in their bylaws or articles of incorporation.
When the nonprofit decides to dissolve, it must follow federal law, which applies to all such organizations, as well as the state law in which the organization is registered. State laws may vary, so it is important to obtain legal advice to ensure the dissolution conforms.
In most states, the board of directors must adopt a resolution and prepare a Notice of Intent to Dissolve. If the nonprofit has creditors, and most do, a Notice to Creditors is sent, informing them that the organization is dissolving. The state will have regulations on how long creditors have to file any claims with the nonprofit for money owed.
Some states may require the publication of a Notice to Creditors, as well as the Notice of Intent to Dissolve, in a newspaper in the county in which the nonprofit organization is headquartered.
Federal law requires that nonprofits distribute any assets held to another nonprofit organization upon the dissolution. No one on the board of directors, organizational members, or any private party may receive such assets. The nonprofit must file a final tax return with the IRS.
Expect the dissolution of a nonprofit to involve considerable planning and to take a fair amount of time. The board must put together a planning group for the dissolution, which includes the president or executive officer. Before any type of in-depth planning gets underway for the dissolution, the board should hire legal counsel.
Once the board agrees on preparing a Notice of Intent to Dissolve, it must send articles of dissolution to either the secretary of state’s office, or that of the state Attorney General. Once that step is taken, the office in question issues a public notice.
Because of the federal law on asset distribution, the board must identify other nonprofits with a similar mission and inquire whether those organizations are interested in receiving the assets. Transfer of assets is complicated, and includes the need to inventory all such assets, including intellectual property. Many legal documents, such as contracts, are usually needed for this asset transfer.
The dissolution is not complete until all steps are finished, including the filing of the final Form 990 with the IRS. Even after the nonprofit has completed its day to day activities, some board action may prove necessary, even though the organization is no longer formally running.
If your nonprofit requires legal representation, contact the experienced nonprofit attorneys at MacMain, Connell & Leinhauser. Call 484-318-7106 or contact us online to schedule a consultation. From our office in West Chester, our experienced attorneys serve clients throughout Chester County and Philadelphia.