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Closing Down the Nonprofit Organization

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Marty Martin

Marty Martin, JD MPA

Whether they’ve fulfilled their mission or become insolvent, a board of directors remains accountable when nonprofits close down. Board members must act in good faith and exercise their requisite legal duties of care and loyalty to the corporation. This may constrain them in what they can do or say to others. Closings may occur in a pressure packed and compressed time frame which can create misunderstandings and heated emotions in what often is a painful and messy process.

A board “closes their doors” through: a merger or acquisition; a voluntary, an administrative, or a judicial dissolution; or a combination of these means. Mergers, acquisitions, and a voluntary dissolution may leave control with the board while an administrative or judicial dissolutions constrain the board’s discretion. All require a plan for closing including mandatory notices and filings.

Preliminary considerations

The board should thoroughly review key legal documents including: IRS 1023 application and determination letter; Articles of Incorporation and Bylaws; financial and tax records including IRS 990 forms; board policies; grant, loan, and donor documents; and applicable law. They must assess the impact to stakeholders. Their review highlights potential opportunities, constraints, and pitfalls while shaping how to close down. They should establish a communication’s strategy and designate someone to discuss the matter publicly.

Board members contemplating closing need to understand key distinctions among possibilities.

Merger or Acquisition.  A merger combines the assets and liabilities of two or more independent nonprofit corporations into a single surviving nonprofit. This surviving corporation serves their combined mission and exempt purposes.  An acquisition occurs when one nonprofit purchases and thereby obtains sole ownership of another nonprofit’s assets. If the nonprofit from which assets were acquired survives, there may be significant remaining liabilities a board must address before closing. This can  be problematic when insufficient resources remain to address residual liabilities.

Voluntary Dissolution. In a voluntary dissolution the board closes the nonprofit after providing for payment of the corporation’s liabilities. Applicable law requires remaining assets go to another exempt organization and prohibits board and staff from receiving them.

Administrative Dissolution. A state agency (e.g. Secretary of State or Attorney General) typically initiates an administrative dissolution to protect at risk charitable assets or when a nonprofit demonstrates an inability or unwillingness to comply with applicable law.

Judicial Dissolution.  A judicial dissolution may be initiated by a state agency; a board member; a member in a membership organization; or a creditor. An insolvent nonprofit may file for bankruptcy. The court determines what happens to the nonprofit and its assets.

Conclusion

Securing legal counsel early in their deliberations helps a board comply with applicable state and federal laws. Finally, the board should prepare for the emotional impact to those affected when closing down.

Marty Martin serves as legal counsel for and provides training to nonprofit and tax-exempt organizations and their boards of directors.  He currently serves on the IRS Advisory Committee for Tax-Exempt and Government Entities.

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