When a Nonprofit Ceases to Operate

Previous articles have discussed the many steps in setting up a nonprofit organization. Like any new venture, starting a nonprofit comes with risks. Not all new organizations succeed. The disruptions of COVID-19, and the economic impacts that have followed, only add to the volatility of new endeavors. In such a landscape, the reality is that some nonprofit entities do not survive and need to navigate the details of ceasing operations. In addition to all the practical matters of shutting down operations, there are technical requirements as well.

 When closing a nonprofit organization, steps must be followed to ensure proper dissolution. Much like the incorporation process, dissolution is governed by the rules of the state in which the entity is incorporated. State requirements vary greatly from one jurisdiction to another, and it may be necessary to consult with legal counsel licensed in the relevant state.

 States require an organization that is shutting down to file Articles of Dissolution. These articles will often contain information such as the name and contact information of the resident agent and or board members, whether the dissolution was approved by the organization’s members or its board, if all debts of the organization have been paid or will be paid, and if all assets of the organization have been distributed in a manner consistent with the organization’s Articles of Incorporation and relevant law. The exact requirements for the Articles of Dissolution vary from state to state. As to whether the members or board must approve the dissolution, and how, an organization should follow the provisions of its own bylaws.

 Some states require the organization to prepare a Plan of Dissolution which contains information about how debts are being satisfied and how assets are being distributed. In a few states, these plans must be approved by a Court or state agency.

 In some jurisdictions, the dissolving entity must obtain clearances from state agencies to demonstrate that all tax obligations of the organization have been satisfied.

Publication requirements exist in some states, under which the organization must provide public notice of the organization’s dissolution by publishing information in periodicals of general circulation.

The nonprofit’s assets must be distributed in a manner consistent with provision in the entity’s Articles of Incorporation or bylaws. Nonprofit organizations must distribute their assets either to other nonprofits organizations, or to government entities, to ensure that all assets that were acquired with nonprofit income remain used for nonprofit purposes.

If an entity is not able to satisfy all of its debt obligations from remaining assets, it may need to file for bankruptcy before completing its dissolution in order to provide for an orderly method of satisfying debtors with remaining assets.

After the state’s dissolution requirements are satisfied, the organization should notify the IRS by filing its final Form 990, or for organizations not required to file Form 990, by sending a letter terminating the organization’s Employer Identification Number account.