There are many reasons a board of directors decides to dissolve a 501 (c) 3 nonprofit, some of the more common reasons include:
- The nonprofit has accomplished what it was formed to do
- The organization can no longer support itself financially
- The nonprofit has lost standing in the community
- Legal issues
Regardless of the reason, there is a process that must be followed to dissolve a nonprofit. It might seem easy to just lock the door, walk away, and let the state decide what to do, but that doesn’t always work out for the best interest of all involved.
The steps to dissolve a nonprofit are:
- Authorizing dissolution
- File a Certificate of Election to Wind Up and Dissolve with the California Attorney General and Secretary of State
- Complete all business matters such as paying debts, distributing assets to other nonprofits, and advising the membership
- Obtain clearance from the Attorney General
- File the Certificate of Dissolution with the Secretary of State
- Submit a final dissolution packet to the Attorney General
- File all required forms with the Internal Revenue Service
Some nonprofits may be eligible to dissolve through a streamlined procedure. Those circumstances include:
- The certificate of dissolution is being filed with 24 months after the articles of incorporation were filed
- The organization was created in error
The person filing the certificate must testify to certain conditions. The process is much simpler than dissolving a nonprofit that has been in existence for a while. A consultation with an attorney is a good idea to make sure everything is covered accurately. The attorneys for nonprofits at San Luis Obispo’s Toews Law Group, Inc. serves as counsel to dozens of nonprofit organizations and has the expertise to help make sure the dissolution is done correctly.
Authorizing the dissolution
A resolution to “wind up and dissolve” that is adopted by the board of directors is the first step. Upon adoption of the resolution, California law provides for voluntary dissolution in one of the following ways:
- Majority approval by members by either verbal vote or by ballot
- An action of the board directors followed by vote by members
- By a vote of the directors if there are no voting members
The resolution to wind up and dissolve must be properly recorded, usually in the minutes of the meeting. Include records of all votes or ballots. This information will be included in all filings with the state and the IRS.
Filing the ‘Certificate of Election to Wind Up and Dissolve’
Upon reaching the formal decision to dissolve the “Certificate of Election to Wind Up and Dissolve” must be filed with the Secretary of State and the Attorney General. The certificate contains:
- A statement that the corporation has elected to wind up and dissolve
- Statements regarding whether the election to dissolve was by vote of the membership, by the board and members or only by the board.
- A statement that signers on the certificate have been authorized to sign
If the election to dissolve is made by unanimous vote of members or the board, or if the organization doesn’t have members, the certificate doesn’t need to be filed.
Completing all business matters
Once the dissolution has been formally authorized the organization continues to exist solely to take care of final matters, known as “winding up.” These final matters include paying debts and distributing any remaining assets.
- Assets are generally not distributed until debts have been paid.
- A 501 (c) 3 nonprofit must usually distribute assets to other 501 (c) 3 nonprofits, but there may be exceptions for items that have been loaned to the organization or items that are still being financed.
- Written notice of “winding up” must be mailed to all members who did not vote for dissolution, creditors, claimants and to the Attorney General.
Obtaining clearance from the Attorney General
Upon written request, the Attorney General issues a letter either waiving objections to the distribution of assets or confirms the organization has no assets. The following needs to be included in the request letter to the Attorney General:
- The intended recipients of any assets or a statement that there are no assets
- A copy of the certificate of election to wind-up and dissolve and a signed certificate of dissolution prepared for submission to the Secretary of State
- Copies of your nonprofit’s IRS Form 990 for the last three accounting periods
- An endorsed-filed copy of your nonprofit’s articles of incorporation, including any amendments.
Filing the ‘Certificate of Dissolution’ with the Secretary of State
Once all business matters are completed file a certificate of dissolution with the Secretary of State. The certificate contains statements specifying:
- The name of the nonprofit
- Required business matters have been completed and the nonprofit is dissolved
- Final tax returns either have been or will be filed
- Known debts and liabilities have been paid or resolved
- The nonprofit has not incurred any other debts or liabilities
Submitting the final dissolution packet to the Attorney General
Mail the final dissolution packet to the Attorney General. The packet contains:
- A copy of the stamped certificate of dissolution that was returned from the Secretary of State
- The final financial report showing the proper distribution of all assets resulting in a zero balance.
Filing required IRS forms
Along with filing IRS Form 990 or 990 EZ, additional filings required by the IRS include:
- Schedule N describing disposition of assets
- Copies of the certificate of dissolution that was submitted to the state
Making it easier to get done
The process of dissolving a nonprofit is detailed and can take some time, especially when it comes to disposing of the assets. Depending the assets, it might not be such an easy matter to transfer them to another nonprofit.
Animal sanctuaries are a good example of how complicated transferring assets can be. Exotic animals especially may be protected by state and federal laws. Unlike household pets, or even horses, they can’t be easily adopted to private ownership.
The San Luis Obispo attorneys for nonprofits at Toews Law Group Inc. have extensive experience and can help make sure every aspect of dissolving a nonprofit is carried out. There may be alternatives to dissolution that have not yet been considered. A consultation before coming to the decision to dissolve a nonprofit may simplify the process considerably. If the decision to dissolve is final, Toews Law Group, Inc. can help make sure the entire process is carried out accurately and promptly.