What Happens When I Dissolve a Non-Profit?

By Roger Jewell

When you dissolve a nonprofit organization, the steps you will need to take are similar to those for dissolving a for-profit organization; however, several additional steps are generally required by the Internal Revenue Service. Dissolution must be done in a manner that complies with the law to prevent directors and officers from being held personally liable for errors, oversights or potentially unlawful actions.

Notice of Intent to Dissolve

The procedures for dissolving a nonprofit organization are similar in most states, but you must satisfy the exact requirements of your state to properly wind up the organization. Generally, this process begins with the directors adopting a resolution to dissolve and preparing a Notice of Intent to Dissolve. This resolution should be dated and kept with the organization’s minutes.

Notice to Creditors

The next step is to draft a Notice to Creditors of your intent to dissolve, which should be sent to all of the organization’s creditors. In most cases, this can be done by regular mail, although using certified mail offers a greater measure of protection. Dissolution cannot be finalized until after the deadline for creditors to file claims for debts owed by the nonprofit. You may be required to publish a copy of your Notice of Intent to Dissolve and Notice to Creditors in a general circulation newspaper distributed in the county where your organization is headquartered.

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Winding Up Affairs

The process of “winding up the affairs” of your nonprofit involves paying creditors and taking other steps to disband the organization. Close attention should be paid to IRS regulations for winding up the affairs of a nonprofit entity. Failure to comply with these tax laws could subject directors and/or officers to substantial penalties, accrued interest on unpaid taxes and personal liability for delinquent taxes.

Distribution of Assets

Any cash, property or other assets held by your nonprofit organization must be transferred to another tax-exempt nonprofit upon dissolution of your organization. The IRS also requires you to file a final tax return. Obtain IRS Publication 4779, “Facts About Terminating or Merging Your Exempt Organization” and Schedule N, “Liquidation, Termination, Dissolution or Significant Distribution of Assets,” for specific requirements that may apply to your nonprofit organization.

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Tax-Exempt Status in Massachusetts

Massachusetts exempts certain nonprofits from having to pay corporate income, property and sales taxes. In order to qualify, your nonprofit must be formed under the state incorporation statute and must obtain federal tax-exempt status from the IRS. After the nonprofit is designated as exempt by the IRS, Massachusetts requires additional filings for each type of tax in which you seek a state exemption.

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

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.

Non-Profit Vs. Incorporation

When we think of corporations, the image that comes to mind is usually a for-profit venture. However, nonprofits can also benefit from incorporation, particularly if the organization is interested in pursuing federal tax exempt status. Yet, the formalities of being incorporated under state law may not be desirable for all organizations operating in the public interest. Smaller nonprofits that receive limited contributions may choose to remain an unincorporated association. Knowing the benefits and drawbacks to incorporation can help you decide whether it makes sense to pursue a corporate structure for your nonprofit.

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