The Duties and Responsibilities of a Board in Dissolving a 501(c)(3)

By John Cromwell

The larger issues of a 501(c)(3) organization, such as whether to dissolve, are generally decided by the nonprofit entity's board of directors. As the chief decision-making body, the individuals serving on this board play a key role in dissolving the organization. In addition to executing the internal process to formally decide to dissolve, the board members are responsible for filing the requisite paperwork with state and federal agencies. The board must also distribute the organization’s assets to another nonprofit organization with a comparable mission to that of the dissolving entity.

The larger issues of a 501(c)(3) organization, such as whether to dissolve, are generally decided by the nonprofit entity's board of directors. As the chief decision-making body, the individuals serving on this board play a key role in dissolving the organization. In addition to executing the internal process to formally decide to dissolve, the board members are responsible for filing the requisite paperwork with state and federal agencies. The board must also distribute the organization’s assets to another nonprofit organization with a comparable mission to that of the dissolving entity.

Vote on Dissolution

Before the 501(c)(3) can be dissolved, the board must draft a plan as to how the organization will wrap up its affairs. When the dissolution plan is complete, it must be voted on by the board. The procedure for determining the dissolution plan and the number of votes required to ratify the plan is determined by the entity's articles of incorporation and bylaws. If the 501(c)(3) has a voting membership, the plan must usually be approved by a two-thirds vote. Otherwise, the dissolution begins once the board approves the dissolution plan.

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State Paperwork

When a 501(c)(3) is formed, it generally must register with the state in which it is based. When it dissolves, the state must again be notified. The documents and information required will vary by state. For example, in Illinois, a 501(c)(3) must file articles of dissolution with the Secretary of State. The dissolving entity must pay a fee and the dissolution paperwork must be signed by the organization’s president or vice-president as well as the secretary or assistant secretary.

Federal Paperwork

Granting of nonprofit status to a 501(c)(3) organization is a function of the Internal Revenue Service under guidelines established in the federal tax code. Just as the IRS must be notified when a new nonprofit forms, the entity must file paperwork with the IRS when it dissolves. The nonprofit can terminate its status by filing its annual return, a version of Form 990, with the IRS and checking the termination box in the header on the first page. Depending on the organization's annual revenue, it may be required to answer questions about the dissolution. A signed Form 990 and a completed Schedule N must be filed, detailing how the nonprofit's assets were distributed. These documents must be approved by the board and submitted to the IRS within four months and 15 days of the entity's dissolution.

Distributing Remaining Assets

When a 501(c)(3) dissolves, the board must settle its outstanding debts and financial obligations. Any assets that remain cannot be distributed to board members or other private individuals. When a 501(c)(3) is initially formed, it is required to include a provision in its organizing documents stating that all assets remaining after dissolution will be distributed to another 501(c)(3) organization. When the entity dissolves, the board must ensure that the residual assets are distributed according to the provisions in the organizing documents.

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What to Do With Money When Dissolving a 501c3?

References

Related articles

What Is a Dissolution Clause?

When you form a new organization, business or partnership, you create a new entity that has a legal life of its own. If you later need to shut down that entity, a dissolution clause can help by providing direction for the shutdown. Such dissolution clauses are sometimes required, but they can be useful even when they are optional.

501(c)(3) Incorporation Laws

Nonprofit organizations that can claim federal income tax exemption under section 501(c)(3) of the Internal revenue Code comply with two sets of laws. The nonprofit is formed under the incorporation statute of a particular state. Each state has its own nonprofit incorporation statute, but they are all substantially similar. The incorporated nonprofit can then apply with the Internal Revenue Service for 501(c)(3) status for recognition as a tax-exempt entity.

How to Apply for Nonprofit Status in New York State

For an organization to be exempt from New York state taxes, it must incorporate as a nonprofit corporation by filing nonprofit articles of incorporation with the New York Department of State under the state Not-for-Profit Corporation Law. There are a number of steps all nonprofit organization should take to operate as a functioning organization in New York. If the organization plans to eventually file for federal 501(c)(3) nonprofit status, there are additional provisions that you must include in the articles of incorporation.

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