How To Dissolve A Nonprofit Organization

How To Dissolve A Nonprofit Organization

Whether the plan is to merge with another organization or shut its doors permanently, dissolving a nonprofit organization can be an emotionally charged process. The legal process of terminating a nonprofit and distributing its assets can also be complex. Nonprofits must go through a process with the Internal Revenue Service (IRS) to dissolve legally according to the agency’s rules that govern how to dissolve a nonprofit organization. To learn more about how to dissolve a 501c3, consider reaching out to the Jennifer V. Abelaj Law Firm at 212-328-9568.

Reasons Why Nonprofits Dissolve

Nonprofit organizations dissolve for many reasons, but mergers are one of the most common reasons why nonprofits dissolve. When an individual 501c3 organization becomes part of another organization, it must dissolve. Nonprofits also dissolve when the organization no longer functions or when the Board of Directors votes to end the operation. According to the National Council of Nonprofits, an increase in dissolutions of small and mid-sized nonprofits occurred in recent years because of the coronavirus pandemic. Regardless of what causes the end of a nonprofit, dissolving a 501c3 organization is a significant decision, and the organization’s leaders should understand how to dissolve a nonprofit legally.  

How To Dissolve a 501c3

When a nonprofit has performed its mission or would better serve its purposes by merging with another organization, the Board of Directors can decide to dissolve the organization. The Board must take an official vote. However, in cases where no voting members remain, the Board may dissolve the charity corporation on its own motion. That only begins the process. Nonprofit leaders must first make a plan of dissolution, which covers how to take care of the charity’s outstanding liabilities and assets. Then, the organization must resolve the remaining debts, distribute the organization’s assets, and file the appropriate forms with the IRS.

What Happens to the Money When a Nonprofit Dissolves?

In many cases, when a nonprofit terminates, the organization has assets. When a nonprofit terminates, the organization must first take care of its liabilities and pay off its debts. If there is money or other assets left over after paying the debts, the organization must distribute those assets legally. Board members and nonprofit leaders cannot distribute the organization’s money to themselves, their family members, or others. The only legal way to transfer a charity’s assets is to move them to other tax-exempt organizations.

How Will Nonprofit Assets Be Distributed if It Dissolves?

When a nonprofit dissolves, there are two options. The organization can distribute its assets to other nonprofits, or it can sell its assets. The nonprofit cannot give its assets away or transfer them to the leaders in the organization because of the nonprofit’s tax-exempt status.

Transferring Assets

In many cases, it may be desirable to transfer assets. If one organization terminates in order to merge with another organization, it may transfer its assets to the organization with which it intends to merge. When a charity closes without merging, however, it can choose another tax-exempt organization to which to donate its assets. In many cases, organizations elect to give their assets to organizations with similar themes, missions, or objectives. Tax-exempt organizations that are dissolving can choose to donate their funds to any tax-exempt organization, regardless of the existence of similar objectives.

Transferring Trademarks

Many organizations approaching dissolution will have trademarks. As trademarks are valuable assets, charities can transfer them to other tax-exempt groups. Often, nonprofit organizations may choose a recipient organization with a like mission that can benefit from owning existing trademark. When merging one nonprofit organization into another, the registered trademarks will generally transfer to the new organization.

Selling Assets

Although many organizations may see transferring assets as the more desirable choice, selling assets is another legal way to distribute assets when a 501c3 organization closes its doors. When a tax-exempt organization chooses to sell its assets, it must receive fair market value from the buyer. This rule exists to prevent organization leaders from circumventing the rule prohibiting personal asset transfers.

If the Board of Directors of a nonprofit votes to shut down an operation that owns many valuable assets, the temptation may be to suggest selling the assets at a loss to family and friends. However, selling assets at a loss would violate the law, as those assets would be considered gifts. A nonprofit’s tax-exempt status prevents it from being able to distribute assets as gifts. However, selling the assets at fair market value is permissible if transferring to another organization is not the best option.

How To Sell Assets

When an organization chooses to sell—rather than transfer—its assets, there are several steps to remember, including:

• Having assets appraised to ensure that the organization sells the assets for fair market value. 
• Keeping a record of all the sales as physical assets become financial assets and must be distributed accordingly

IRS Forms

Terminating a nonprofit organization requires filing the appropriate forms with the IRS to officially end the organization. These forms include: 

• Form 990—the form that tells the IRS that the organization is no longer operational. Three versions of Form 990 exist—the general form, 990-N, and 990-EZ—and the organization must choose the correct form based on its gross receipts 
• Articles of dissolution or merger
• Plans to end or merge the nonprofit 

If a charity fails to submit this paperwork correctly, it may run into problems. A lawyer experienced in non-profit dissolution can help an organization’s leaders avoid some of these issues when dissolving a nonprofit.

State-Specific Rules

In addition to complying with federal law, the dissolution of a nonprofit must also comply with state law. If you have nonprofit dissolution questions specific to New York and New Jersey, the experienced attorney at the Jennifer V. Abelaj Law Firm may be able to help.

Contact a Nonprofit Attorney for Help with Understanding How to Dissolve a Nonprofit

Navigating the end of an established nonprofit organization, whether for merger or other reasons, can be complex. If you are ready to end or merge a nonprofit organization and would like help from a knowledgeable nonprofit attorney, consider contacting the Jennifer V. Abelaj Law Firm by calling 212-328-9568 to schedule a consultation today and learn more about how to dissolve a nonprofit.