What to Do With Money When Dissolving a 501c3?

by John Cromwell

To qualify for 501(c)(3) status, an organization must operate exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster amateur sports competition, or for the prevention of cruelty to children or animals. When a 501(c)(3) dissolves, the organization must settle all outstanding liabilities and distribute any leftover funds according to the provision set in its charter.

Resolving Debts

When a nonprofit decides to dissolve, the first thing it must do with its assets is satisfy all of its outstanding debts and liabilities. If the directors of the 501(c)(3) are keeping good records, they should be aware of the outstanding debts of the organization. To ensure that the organization settles all its debts, they may consider contacting any organizations or individuals with whom the 501(c)(3) has recently done business to inquire if any outstanding financial obligations exist.

Donating to a Like Cause

After the dissolving 501(c)(3) settles its debts, it may not transfer any remaining funds to shareholders or board members of the organization. When a 501(c)(3) organizes, it must include a provision in its charter defining how it will distribute any leftover assets when it dissolves. Generally, it must donate any remaining funds to another organization that has a similar mission to its own, a charitable organization, or to the federal government.

Transfer Process

Prior to transferring the cash to another charitable organization, the dissolving 501(c)(3) must do some due diligence and take some procedural steps: First, the dissolving 501(c)(3) must acquire information regarding the recipient organization's governing structure, its financial reports for three years, a copy of the recipient’s IRS letter of determination, and an affidavit of the recipient’s board stating the recipient is tax-exempt. After obtaining this information, the dissolving 501(c)(3) may have to obtain permission from the state where it is located to transfer the assets. Once it obtains permission, it can transfer funds to recipient, generally within a specific time frame.

Federal Filings

When the 501(c)(3) terminates, it must inform the IRS how it is going to dispose of its funds. When it files its final annual return, Form 990, it must enclose a completed Schedule N detailing how the assets of the organization were distributed. Schedule N describes all the assets disposed, including cash, as well as detailing any transaction fees and when distribution occurred. The IRS must receive the completed Form 990 and Schedule N within 4 months and 15 days of the dissolution of the 501(c)(3).