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.

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.

Ready to form a nonprofit? Get Started Now

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).

Ready to form a nonprofit? Get Started Now
The Duties and Responsibilities of a Board in Dissolving a 501(c)(3)

References

Related articles

Tennessee Guidelines for a Nonprofit Business

Anyone operating a nonprofit business in Tennessee needs to know the state regulations to avoid putting their organization in jeopardy. Nonprofits that do not follow Tennesse law may face fines -- or, ultimately -- dissolution. Tennessee law regulates how a nonprofit organization is registered, what nonprofit businesses or organizations can do with their profits, how the organizations can fundraise, and when they can avoid sales tax. The state also imposes annual reporting requirements on all nonprofits.

What Is a 501(c)(3) Determination Letter?

The Internal Revenue Service sets down the tax rules for nonprofit corporations, including the charitable organizations formed under state law and in accordance with Section 501(c)(3) of the federal tax code. A 501(c)(3) should operate in the public interest or for charitable purposes and not for the profit of any individual or group. If the 501(c)(3) conforms with these requirements, it is tax-exempt. The IRS is the final arbiter on tax status, using determination letters to hand down its decisions.

Wisconsin Non-Profit Laws

A nonprofit is an organization formed to serve the public good, such as for a charitable, scientific, religious or educational purpose. The goal of a nonprofit is not to create profits for investors. The Wisconsin nonprofit laws provide guidelines for forming and operating a nonprofit in the state. Nonprofits generally follow the requirements of non-stock corporations, but have strict restrictions on profit distributions. All nonprofits should be careful to follow the legal requirements of their states, and may face fines or dissolution if not in compliance.

Doing the right thing has never been easier.

Related articles

What Happens When I Dissolve a Non-Profit?

When you dissolve a nonprofit organization, the steps you will need to take are similar to those for dissolving a ...

Steps for Dissolving a Nonprofit

Nonprofit organizations usually aim to raise funds for a particular social, educational, charitable or religious ...

Pros & Cons of the 501(c)(3)

There are more than 1 million 501(c)(3) organizations, otherwise known as nonprofits, in the United States serving a ...

How to Dissolve a Charitable Non-Profit Organization

Charities provide important services to their communities, but many charities eventually cease to operate. For example, ...

Browse by category
Ready to Begin? GET STARTED