How to Dissolve a Charitable Nonprofit Organization

By Laura Payet

How to Dissolve a Charitable Nonprofit Organization

By Laura Payet

Nonprofit organizations, like any other kind of institution, sometimes come to the natural end of their useful lives. And, like for-profit companies, they must properly dissolve and wind down to limit the potential for ongoing liabilities and penalties. While the process for dissolving a charitable nonprofit is similar to dissolving a for-profit business, it is not exactly the same. In addition to winding up the business and filing a certificate of dissolution, some states require a nonprofit to petition the court or the state Attorney General (AG) for permission to dissolve, and the Internal Revenue Service (IRS) also requires forms specific to tax-exempt organizations.

People at conference table talking

Step 1. Vote to dissolve.

Consult the founding documents that govern the nonprofit's functioning to see what the process is for dissolving. If the organization is a corporation, this document is the bylaws; if it's an LLC, it's the operating agreement. If the documents don't specify, state law provides the framework. Typically, a majority of the board of directors, shareholders, or members (in the case of an LLC) must vote to dissolve. State law may require that the organization submit a resolution signed by all those individuals voting in favor to the appropriate state agency as part of the organization's dissolution filings.

Step 2. Prepare a plan of dissolution.

A plan of dissolution can be simple or complex, depending on the size and complexity of the nonprofit. The goal is to identify all the organization's assets and liabilities and lay out a plan for disposing of each one. Although it may not be required as part of the plan, management should also strategize about how to notify the general public, the organization's donors and volunteers, and the population the organization serves that it will be closing its doors. If the organization works with state agencies, inform them as well.

Step 3. Pay off debts and liabilities.

Give notice to the nonprofit's creditors that the organization is dissolving. Some states require a specific form of notice, informing creditors of the deadline to file claims and stating that claims not filed before that time will be barred. Pay off all outstanding debts and liabilities. Be sure to cancel any business licenses and ongoing contracts.

Step 4. Distribute any remaining assets.

If the nonprofit retains any assets after paying all liabilities, distribute them appropriately. Note that assets cannot be disbursed among the nonprofit's management or members. Federal law governing tax-exempt organizations stipulates that these remaining assets can only be distributed to another tax-exempt organization.

Step 5. File dissolution papers with the state.

As with for-profit businesses, a dissolving nonprofit must file a certificate of dissolution, sometimes also called a certificate of cancellation or articles of dissolution, with the state. Typically, the organization files this document, often accompanied by the resolution to dissolve, with the state agency that regulates businesses. Some states, however, require additional documentation and approval. For example:

  • In New York, a nonprofit must petition the court for permission to dissolve.
  • Michigan requires permission from the AG's office to dissolve.
  • California requires a letter of clearance from the AG confirming that the organization has no more assets.
  • In Pennsylvania, a nonprofit must request court permission to distribute assets and notify the AG of its plan for dissolution.

An online service provider can assist with preparing and filing the necessary dissolution paperwork and may even offer the opportunity to consult with an attorney.

Step 6. File final tax returns.

Tax-exempt organizations generally must file an annual Return of Organization Exempt From Income Tax Under section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code (except private foundations) (Form 990) or Short Form Return of Organization Exempt From Income Tax Under section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code (except private foundations) (Form 990-EZ) with the IRS. A dissolving nonprofit must indicate on its final Form 990 or Form 990-EZ that it is discontinuing operations or has disposed of its assets. It must also check the box indicating a final return.

Additionally, the dissolving nonprofit must file Liquidation, Termination, Dissolution, or Significant Disposition of Assets (Form 990 or 990-EZ, Schedule N) disclosing how and to whom its assets were distributed. Both Form 990 and Schedule N are open to public inspection. If the nonprofit had employees, additional federal tax filings may be necessary. The state may also have final tax filing requirements.

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