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Nonprofit Education

Reinstatement Series 5: How to Properly Dissolve a Nonprofit

Let me introduce you to Time To Close, Inc., a fictitious nonprofit facing a decision to dissolve the organization. Time To Close, Inc. is based on real-world organizations that face decisions about closing.

Time To Close, Inc. was once a great nonprofit organization. They had consistent fundraising and served clients throughout their community. In recent years, the founder has grown older and is considering retirement. The Board of Directors doesn’t share the same level of passion as the founder, who is the only paid employee and provides most of the organization’s services. As a result, fundraising waned, and the number of community events decreased.

Time To Close, Inc. has maintained strict compliance with federal and state reporting requirements throughout its years of operation. The organization files a 990-EZ with the IRS every year and annual reports and charity registration renewals with their state.

Now that the nonprofit faces closure, The Board of Directors wants to ensure the organization dissolves correctly. They reached out to the nonprofit specialists at BryteBridge to help them through the dissolution process. Here are the questions BryteBridge helped Time To Close, Inc. work through:

Why do nonprofits dissolve?

While deciding to close a nonprofit is never easy, there are many reasons an organization chooses to close. Here are a few of the most common reasons:

Deciding to close a nonprofit does not reflect a failure of mission or the Board of Directors. All organizations have a natural lifecycle that doesn’t last forever. The BryteBridge specialist helped Time To Close, Inc. recognize and celebrate its many accomplishments.

How do we close the organization?

All nonprofits are legal entities, so their dissolution requires a few steps. Following the correct procedure ensures all requirements are fulfilled, and there are no potential legal or tax implications in the future.

The first step to dissolution is ensuring the organization is in good standing. Nonprofits that don’t file annual reports or 990 tax returns are potentially not in good standing. This means their organization may not legally exist, or its tax-exempt status may be revoked. In this case, the first step to properly dissolving is reinstating the organization and returning to good standing.

While reinstating an organization only to dissolve it seems counter-intuitive, it’s a matter of ethical and fiscal responsibility. Dissolving a legal entity requires multiple fiscal checks that do not happen when an organization is not in good standing. Reinstating ensures the organization completes the necessary checks and dissolves ethically.

Thankfully, Time To Close, Inc. was in good standing, so the process to dissolve could begin right away.

  • Board Meeting: The Board of Directors met to vote on dissolution. With a majority of the board voting in favor, Time To Close, Inc. officially was on the path to closing.
  • Department of Revenue: Time To Close, Inc. first had to get tax clearance from its state Department of Revenue, showing the nonprofit does not have outstanding taxes or fees due.
  • Articles of Dissolution: Time To Close, Inc. filed their dissolution and officially terminated the legal entity with a clear tax bill. Some states, like California and New York, have additional requirements that must be completed before dissolving. We’ll discuss some of these in a future article. 
  • 990 Tax Return: Once dissolved, Time To Close, Inc. waited until the end of the fiscal year to file the last 990-EZ tax return with the IRS. The Board of Directors indicated it was their final 990 filing within the return. Once accepted and processed, the IRS dissolved the entity’s tax-exempt status and completed the organization’s closure.

Time To Close, Inc.’s BryteBridge specialist explained the steps involved and assisted the Board of Directors to ensure everything was prepared and processed correctly.

What about our assets?

Even when organizations run out of funding, they often still have assets — be they monetary or physical assets. Time To Close, Inc. still had a few thousand dollars in its bank account and several tools and supplies used during its community events.

Following the IRS rules governing nonprofit organizations, the Board of Directors had two things remaining to do with its assets.

  • Pay off Liabilities: Before dealing with the final assets belonging to a dissolving organization, it must settle any outstanding liabilities. The money in the Time To Close, Inc. bank account would need to cover all remaining liabilities (credit cards, loans, etc.) and the filing fees required for dissolution.
  • Donate Assets: Once all liabilities are settled, any remaining money or physical assets must be given to another active and good standing 501(c)(3) nonprofit organization.

The Time To Close, Inc. Board of Directors found another organization in their area with a similar mission and donated all the remaining assets to their organization. While deciding to close the organization, the Board of Directors and the founder were pleased knowing their donation would help a similar organization continue serving the community.

Wrap-Up

There are many reasons a nonprofit decides to close its doors. While the decision doesn’t usually come easily, properly dissolving a nonprofit organization requires a thorough and detailed process.

If your organization is facing dissolution, contact the nonprofit specialists at BryteBridge and remove stress from the process.