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Nonprofit Dissolution: What to Do When Closing Up Shop

November 28, 2016

Shutting down an organization dedicated to achieving a specific mission is difficult, to say the least. Learn how you can make this process as painless as possible.

Sometimes a nonprofit organization must close its doors. The dissolution, or closing, of an organization happens more often than one might expect, and not only is this process emotionally taxing, but it also physically demanding, too. If you’re facing possible dissolution, here’s what you need to know.
Common reasons for dissolution

Voluntary Reasons

  • Your mission has been achieved and funds would better serve another organization who has yet to achieve its mission.
  • Your nonprofit has suffered a financial crisis
  • Internal disputes have taken over the nonprofit.
  • The board and key staff have exhausted all practical alternatives to improve the nonprofit’s struggling state (restructuring, downsizing, refocusing mission, changing leadership roles, merging with a similar organization, etc.)

Involuntary Reasons (“Automatic Dissolution”)

  • An external shutdown is required per the state’s attorney general’s office or the office of the secretary of state for reasons such as:
    • Failure to file certain annual reports
    • People opposed to the continued existence of the nonprofit

What to do once you think you might dissolve

A few recommendations once you reach the point where dissolution might be inevitable...

Keep it private- It is important that only the organization’s key staff and board members know about the possible dissolution during initial discussions.
Make sure the board and key staff has ample time to “de-brief”- Those making the decision to dissolve need sufficient time to address the issues at hand, so as to not leave administrative and program staff uncertain about the health of the organization.

Developing a plan for dissolution

The board should engage legal counsel and create a sub-committee to develop a ‘Dissolution Plan Document’ to be presented to the board.

Procedures for winding down and dissolving the organization

  • Draft a resolution to dissolve the organization and have each director sign the resolution.
  • Complete a certificate of dissolution. This process will vary from state to state.
  • Ensure all applicable tax filings are up to date and complete.
  • The directors will need to agree and draft a plan of liquidation, indicating exactly how they intend to wind-down the organization, and how they will distribute any remaining funds.
  • Most states require that assets be distributed to other charitable organizations or governmental bodies (so that assets can continue benefiting similar purposes).
  • Once an organization has been dissolved, it no longer exists in legal terms for the purpose of pursuing its original aims. However, the organization technically still “exists” for the purpose of pursuing or defending court actions or otherwise winding down the business.

This means the organization can sue and be sued even after it has been dissolved.

It is easy to get caught up in the discouragement of the process, but as you’re closing up shop, it is important to remember the history of your organization, and the impact you have made, big or small, on the mission you set out to achieve.

Think you might be at risk of dissolution? Contact our Not-for-Profit Services team for guidance.

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