What to Do With Money When Dissolving a 501c3?

By Belle Wong

What to Do With Money When Dissolving a 501c3?

By Belle Wong

A nonprofit organization might need to dissolve for any number of reasons. Whether it's because the nonprofit has met and finalized its purpose and mission, or its goals can't be met, dissolution is often an emotional time for the nonprofit's founders. If you find yourself in the difficult position of having to dissolve your 501(c)(3) tax-exempt organization, it's essential to understand what you need to do when it comes to your nonprofit's assets and liabilities.

Dealing With Your Nonprofit's Liabilities

Because your nonprofit organization will need to pay off its debts before dissolution, one of the first steps you should take is to assess all of the organization's outstanding liabilities. These include current debt, taxes, and any future liabilities.

Once all outstanding liabilities have been determined, you must pay off each debt. If the nonprofit doesn't have sufficient cash to pay the amounts, it may be necessary to sell off some of its assets to generate the funds.

Dealing With Your Nonprofit's Assets

Once your nonprofit's debts have been satisfied, you can then deal with any remaining assets. To obtain its original 501(c)(3) status, your nonprofit had to meet the Internal Revenue Service's exempt purposes' requirements. Thus, your nonprofit's originating documents contain a provision that provides that, on dissolution, its assets can only be distributed for an exempt purpose.

Generally, this provision is met by distributing any remaining assets to either another tax-exempt nonprofit or charitable organization (that is, another organization with 501(c)(3) status), or to the government, whether federal, state or local. The critical thing to remember is that these dissolution requirements govern the distribution of your nonprofit's assets, and this means the assets can't be distributed to individuals such as your nonprofit's members or the people your organization has been providing services to.

Informing Relevant Government Agencies

You will need to give formal notice to the IRS of your nonprofit's termination, and this notice will detail how all remaining assets have been disposed of. This is accomplished by filing a Schedule N to the nonprofit's final annual return (typically either Form 990 or Form 990-EZ). Schedule N requires you to include the following information:

  • Description of the assets and any transaction fees associated with the assets' disposal
  • Dates of distribution of each asset
  • Assets' fair market value
  • Information about the tax-exempt recipients of the assets

Additionally, you will need to contact your state's attorney general's office to determine what supplemental state filings you will need to make to dissolve your nonprofit under state laws properly. Depending on your state, you may need to file certified copies of your nonprofit's articles of dissolution or its completed Form 990 or Form 990-EZ with your state as well as any other required supplemental filings.

Dealing with the dissolution of your nonprofit can be a stressful time emotionally. Still, it's important that you meet all legal requirements when it comes to disposing of the organization's assets so that your organization doesn't run afoul of the IRS's requirements on 501(c)(3) dissolutions.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.