There are many reasons for dissolving an organization, but the decision is never easy. There are usually many factors, decisions, and situations that lead up to the moment dissolution is discussed. The dissolution process itself is often complicated and largely depends on your state. Below, we’ll walk through the typical steps with examples from multiple states. If your nonprofit organization needs to close, let the experts at BryteBridge handle the dissolution process on your behalf.
Step 1: Motion to Dissolve
Since a Board of Directors governs nonprofit organizations, dissolution requires a motion and vote by the board. An official notice of a board meeting must be sent out according to the organization’s bylaws to ensure all board voting members are aware of the meeting.
Once the Board of Directors convenes with a proper quorum per the bylaws, the meeting can commence. At the meeting, there are many orders of business to conduct requiring recorded votes and detailed minutes. In some states, these minutes are required to file dissolution paperwork.
- Motion to Dissolve: The Board of Directors and all voting officers must vote on a motion to terminate the organization. Once the vote occurs, the board secretary records the activity and results in the official minutes.
- Cessation of Operations: Once a motion to dissolve is approved with a majority vote, the organization should decide when all operations will cease. After the meeting, there may be a period where the organization winds down operations and programming. The organization should choose when and how this process occurs.
- Community Announcement: During the meeting, the Board of Directors should decide how and when to notify the clients, donors, volunteers, and the community. This message may be the same or targeted to specific groups depending on the organization’s size.
- Resolution of Debts and Liabilities: Deciding to close a nonprofit does not erase credit card debt or other liabilities the organization holds. During the meeting, The Board of Directors should also address any outstanding obligations and liabilities held by the organization. The minutes should reflect who will settle these and when that will occur.
- Asset Distribution: Once liabilities are settled, any remaining assets (including money, physical goods, and intangible trademarks) must be donated to a tax-exempt nonprofit or government entity. During the final board meeting, the voting stakeholders should decide what organizations to donate assets to and when distribution will occur.
- Legal Filings: The final step to dissolving a nonprofit organization requires multiple legal filings at the state and federal levels. The minutes should reflect who is tasked with this process (likely one of the officers) and when filings will occur.
Member-based organizations like churches or trade associations must have another meeting following the board meeting. Once the Board conducts a meeting with the discussions listed above, they present a formal proposal to the membership with the adoption recommendation. The membership must have a majority of members approve the recommendation to officially dissolve the entity.
Step 2: Legal Filings
Once the Board votes on dissolution, the organization must undertake the procedures necessary to terminate the entity legally. Unfortunately, each state has different laws and processes to dissolve nonprofit corporations. Below, we explore the government entities that require filing and notice in most states.
Want to know what filings are required in your state? Contact the nonprofit experts at BryteBridge today.
Most states require nonprofit corporations to register as legal charities or hold a solicitation permit. The Office of the Attorney General typically assigns these permits and maintains charity registrations. Closing a nonprofit requires notifying the Office that the organization will no longer solicit donations.
Some states require additional notification and approval before filing to stop solicitation. For example, New York requires organizations with more than $25,000 in assets or any debts at the time of dissolution to receive authorization from a state Supreme Court judge before notifying the Office of the Attorney General.
Department of Revenue
Like all nonprofit organizations must file annual federal tax returns, many states also require state tax reporting. When dissolving a nonprofit, these states usually require requesting tax clearance from the Department of Revenue. Tax clearance shows that the organization does not owe any outstanding taxes, and all late fees and taxes are paid.
For example, nonprofits located in Tennessee must request a tax clearance from the Department of Revenue. Once provided, they must include it with Articles of Termination filed with the Secretary of State. Tennessee nonprofit organizations will not be permitted to dissolve without a tax clearance.
Secretary of State
The same state body that accepts and files Articles of Incorporation handles Articles of Dissolution. In most cases, this responsibility lies with the Secretary of State. Just as the Articles of Incorporation legally form a corporation, the Articles of Dissolution terminate its existence.
How an organization files Articles of Dissolution depends on the state. For example, Florida requires physical documents mailed to the Division of Corporations with the required filing fee.
While an organization goes through all the steps listed above, the organization is not officially dissolved until the Articles are filed. In some cases, this may be many weeks after sending the articles. In states requiring clearances and approvals before filing Articles of Dissolution, the process may take many months or even years.
Nonprofit organizations notify the IRS of dissolution by filing a final 990 tax return for the last fiscal year. The IRS only accepts tax returns after the organization’s fiscal year ends. As a result, there may be a period between dissolving and when the organization can notify the IRS. In this case, the person responsible for filing 990s must understand the filing windows.
Step 3: Maintain Records
Once nonprofit organizations are dissolved, there are plenty of confirmations and copies of filed documents to archive. The official record keeper, usually the final board president or secretary, should keep copies of these documents, board meeting minutes, and financial records for at least three years. Depending on state laws, the length of time required to hold onto copies may be much longer.
Holding onto documents from a closed organization may seem like an easy way to clutter up a closet. However, they’re essential should the IRS conduct an audit or other legal issues arise. For example, dissolved nonprofits can still be sued for up to five years following dissolution in Georgia. Maintaining records may be the only way to prevent judgments post closure.
Dissolving a nonprofit organization is a complicated and often emotional process. Depending on the state, it can also take a long time to terminate the corporation officially. Regardless of the time involved, properly dissolving the nonprofit is the final responsibility of the Board of Directors and culminates the organization’s activities.
Does your organization need to dissolve? The nonprofit specialists at BryteBridge are ready to assist with the complexities of your state.