Closing a Chapter with Care
Dissolution is the legal process of ending a nonprofit’s corporate existence and is governed by state and federal laws. Organizations considering dissolution are strongly encouraged to consult with a qualified attorney, accountant, or other professional advisor with experience in nonprofit law. Professional guidance is particularly important for completing final IRS filings and providing required notifications that the organization has ceased operations. This communication is provided for informational purposes only and does not constitute legal or financial advice.
Two Legal Firms in Salt Lake that specialize in nonprofit legal work include Holland & Hart and Aaron Garret at Hall & Evans (1-hour consultation discount available for UNA members).
These firms may be able to provide guidance throughout the dissolution process.
Step 1: The Role of the Board of Directors
The board of directors must vote to dissolve the organization, but its responsibilities do not end with that vote. Before making a decision as significant as dissolution, the board must engage in deliberate discussion, reach consensus, and take formal corporate action. This action typically includes a documented vote, recorded in the meeting minutes, affirming that dissolution is in the best interest of the organization.
In most cases, this decision is formalized through the approval of a written plan of dissolution, which must be drafted before the vote takes place (see Step #2). The board’s responsibility to evaluate whether continued operations serve the organization’s mission begins well before the plan is drafted and continues throughout the dissolution process, including after the plan is adopted.
In some circumstances, permanent closure may not be the only option. As with for-profit entities, nonprofits may consider restructuring through the bankruptcy process rather than dissolving entirely.
Boards should also review the organization’s articles of incorporation and bylaws, as these governing documents often contain specific requirements related to dissolution.
Practice Pointers
- Dissolution takes time and may continue for several months after operations have ceased, so it is important that at least the minimum number of board members required by the bylaws remain in place to help with the dissolution process.
- Dissolution is complete only after all documents are filed with the State and with the IRS.
-
Communication with employees, volunteers, donors, and the broader community is an important board responsibility during dissolution. While some information may need to remain confidential, the public generally expects transparency from a nonprofit’s leadership during this process.
- To ensure consistent and accurate messaging aligned with the organization’s values and legal obligations, it is wise to name a spokesperson and establish key agreed-upon talking points so communications coming from the organization are consistent. (Nonprofit Risk Management Center)
Step 2: Drafting the Plan of Dissolution
Practice Pointers
- Some states provide a template or sample form for a plan of dissolution, including for example, this basic plan of dissolution from Illinois. While Utah does not require a specific template, the plan should be thorough and well documented. It should identify all known assets and liabilities, describe how liabilities will be satisfied, specify which qualifying nonprofit organizations will receive remaining assets, and include the estimated fair market value of those assets.
-
The plan of dissolution should clearly define roles, responsibilities, and timelines ito ensure accountability and effective oversight during a process that frequently continues after operations have ceased.
- As part of the dissolution process, a nonprofit is required to complete Schedule N (Form 990), Liquidation, Termination, Dissolution, or Significant Disposition of Assets.
- Utah has various requirements for dissolution, some of which may be found here. We encourage consulting an attorny with nonprofit experience to make sure that the dissolution meets aff state and federal requirements. State laws differ, in several states a nonprofit can’t just file its plan of dissolution without also going through other steps, such as filing a petition in court (New York) or seeking permission from the attorney general (Michigan) for approval of its plan. Utah State Government agencies that handle incorporations as well as the other end of the lifecycle, dissolutions.
- Once the articles of dissolution are filed with the state, the state will stamp the articles of dissolution as “filed” and return the official document to the address on record.
Step 3: Paying the Nonprofit’s Liabilities
All of the nonprofit’s liabilities, including tax obligations, must be identified, including current debts as well as future or contingent obligations such as ongoing contracts, leases, or other commitments. The organization should then develop a plan to satisfy outstanding liabilities and formally terminate any recurring or future obligations. Some nonprofits may have restricted funds or future liabilities reflected on their financial statements, in which case the assistance of a qualified accountant may be necessary. The board should determine whether existing cash is sufficient to meet these obligations or whether certain assets must be liquidated to pay outstanding debts.
If the organization is unable to satisfy its liabilities and does not have sufficient remaining assets, bankruptcy bankruptcy may be an appropriate, or the only, alternative. Final financial statements should reflect that all liabilities have been resolved and that no assets remain undistributed.
Step 4: Distributing the Assets
Federal law requires a tax-exempt charitable nonprofit that is dissolving to distribute its remaining assets ONLY to another tax-exempt organization or to the federal government or a state or local government for a public purpose. Therefore, the dissolution process necessitates identifying other nonprofit(s) or government entity to accept any assets of the dissolving nonprofit. You will need an inventory of assets to manage this part of the process smoothly. “Assets” could include cash, tangible property such as vehicles or office equipment, and/or intangible property such as data or intellectual property. The transfer of assets may also invoke legal documents such as property deeds, contracts, and trademark registrations.
This means that in the dissolution process your nonprofit cannot give any of its property away to individuals, including board members, other volunteers, employees, or those served.
The nonprofit can, however, sell its assets, as long as the individual or entity purchasing the asset is paying a reasonable amount, ideally the “fair market value.”
Start with an inventory of assets, then plan which assets will be sold/transferred/contributed.
Some assets may require external appraisals/valuations, while the monetary value of others will be straightforward.
Don’t overlook trademark registrations as a potential asset that need to be transferred.
Document all transfers and sales, noting the fact that transfers of assets are only to other entities with tax-exempt public charity designation (501(c)(3)) or to a federal/state/tribal/local government.
Practice Pointers
It is key that all remaining assets be distributed in a manner that is consistent with 1) federal and state law, 2) your organization’s bylaws or articles of incorporation, and 3) the plan of dissolution.
Step 5: Other Legal Considerations
When any entity winds down there are legal implications related to termination of leases and other contracts such as those relating to operations (i.e., the physical plant), programs, financial management (i.e., the nonprofit’s auditor), and potentially human resources (i.e., independent contractors and consultants).
Practice Pointers
Read through each of your nonprofit’s existing contracts to determine the appropriate ways to handle non-renewal or termination of the contract, noting how much notice is required to terminate each contract, as well as any penalties that your organization will be responsible for as a result of early termination.
After the board makes the decision to wind down, the organization should notify employees who are likely to have questions ranging from the timing of their last day of work to their eligibility for unemployment compensation, so be prepared to help them with their own employment transition.
Communicate through designated spokespeople with beneficiaries of the nonprofit’s services so they can make alternative arrangements as far in advance as possible.
Your organization should also inform volunteers, donors, sponsors, and vendors about the decision to wind down. Make sure to provide all donors for the time period prior to closure with gift acknowledgments.
Step 6: Notify Other State Agencies
Once the Articles/Plan of Dissolution is filed with the state, contact state authority(ies) to inform those offices that the nonprofit is no longer operating. State agencies that may be relevant for your nonprofit include the Attorney General or other state charity official that regulates charitable solicitation registration, the state taxation office, state department of labor (if the nonprofit had employees), and any state licensing authorities, such as department of health or human services, that may have accredited or licensed the nonprofit’s activities. Larger workplaces may have obligations under state WARN laws (Worker Adjustment and Retraining Notification).
Step 7: Notify the IRS
The next step is to let the IRS know that the organization is officially dissolved in its state of incorporation.
The way to inform the IRS of the organization’s dissolution is by filing the organization’s final IRS Form 990 (and 990-T if applicable). The Form 990 is due within 5 months and 15 days after the last day of the organization’s most recently completed fiscal year, but if a nonprofit closes its doors mid-year, it can file the 990 as soon as it has completed all the state dissolution requirements, even if the fiscal year is not yet over. Form 990-N filers should file a final 990-N for the most recently completed fiscal year.
Note: if your organization files either the regular IRS Form 990 or 990-EZ:
Under Box B on the header of the first page, you must check the box that states “Final return/terminated.”
Submit Schedule N, which documents the tax-exempt entity(ies) to which your organization is transferring its remaining assets.
Disclaimer: Dissolution is a change in your nonprofit’s corporate status that is governed by state law. We strongly recommend seeking guidance from a lawyer, accountant (regarding final IRS filings), or other professional advisor who has experience with state laws relating to dissolution of tax-exempt organizations and also will be able to guide you through the necessary steps to notify the IRS at the appropriate time that the nonprofit is no longer operating. This email does not constitute legal advice.