As a nonprofit organization approaches the end of its life cycle, there are items to consider and filings to prepare that are inherently different from their for-profit counterparts. Nonprofits may cease operations for numerous reasons whether it be that they have fulfilled their mission or that they decide to merge with another tax-exempt organization. In either scenario, the board and management should be aware of the complexities involved, and should work with advisors that are familiar with nonprofit dissolutions. Many of the items discussed below should be accomplished under the guidance of an experienced nonprofit attorney.
First, nonprofit organizations need board approval in order to dissolve the organization and there should be a consensus among board members that dissolution is the best path forward. When voting on dissolution, the board of directors should be mindful of what the bylaws dictate about dissolution and the time needed for complete dissolution of an organization. Even if operations have ceased for the organization, it must maintain at least the minimum number board members allowable as described in the bylaws. Moreover, if dissolution is indeed determined to be the best option for the organization, a plan of dissolution should be drafted detailing how assets will be distributed, and liabilities will be paid off. The board should maintain transparency throughout this process and inform donors of their plans.
These organizations will also need to file articles of dissolution in all the states they operate in. Not all states have the same procedures with regard to dissolution of a nonprofit organization, therefore, it is imperative that the organization understand the specific procedures for the applicable states. Tax-exempt organizations that are ceasing operations must distribute their assets to another tax-exempt organization or to a governmental entity. Even during its dissolution, no individuals can inure to the earnings of a tax-exempt organization. It’s important to read the bylaws carefully to ensure that the assets of the organization are distributed to previously approved nonprofit and governmental organizations in the approved amounts or allocations. Other considerations include notifying any other applicable agencies to alert them to the dissolution of the organization.
On the final Form 990-series filing, organizations that are dissolving, liquidating, terminating, or reducing their operations by more than 25% are required to complete Schedule N. These organizations would mark yes to either line 31 or 32 on the Checklist of Required Schedules on the main Form 990 (or line 36 on Form 990-EZ) and complete the corresponding part on Schedule N. The articles of dissolution or merger should be attached with Schedule N for filing. If not available, then the organization should attach a resolution from the board approving its termination or merger.
Organization’s that have been fully liquidated, dissolved, or terminated should answer yes to line 31 and complete Part I of Schedule N, list the assts transferred out of the organization and complete the checklist. If all assets and liabilities were transferred out during the tax year, the balance sheet on the Form 990 should also reflect that there are no assets or liabilities at the end of the year. If the organization is in the process of disposing its assets during the year and disposed more than 25% but not 100% of its net assets, organizations should answer yes to line 32 instead and complete Part II on Schedule N. The final Form 990 or Form 990-EZ should be marked final.
Please reach out to the Nonprofit Solutions Group for more information. We work closely with nonprofit attorneys who are experienced in the legal complexities associated with the dissolution of a nonprofit organization, and we can help you navigate the required financial disclosures and tax filings.