Dan wasn’t exactly glad to be done. But he was relieved. Dan had enjoyed forming and operating his 501(c)(3) organization. Doing so had given him a lot of confidence. He had also learned a lot and, he hoped, helped a lot of people. Yet he knew that now was the time to end it. Dan was ready to start a for-profit business. He had the plans and capital, and even the contracts. He now knew he could make it in the nonprofit world. He wanted to prove it to himself and his doubters that he could also make it in the business world. And besides, the people whom his charity had been helping were much better off than they’d been. The economy had improved, and so had the community and the prospects it offered. Dan didn’t feel bad about closing his charity’s doors. He just wanted to make a good end of it.

Cycles

Charitable organizations can have natural life cycles. On one hand, we will always have the poor with us, to serve, care for, and help back on their feet through charitable ministries. On the other hand, charity should not become a disabling excuse and crutch for others who would be better off supporting themselves. Communities and their disadvantaged populations change, and charities should change with them. Some charitable organizations find that their service is no longer necessary, critical, warranted, or helpful, under those changing circumstances. Other charitable organizations perceive the continuing need for their charitable services but lose the ability to attract the resources to meet those needs. One way or another, some charitable organizations must conclude their operations, whether voluntarily or involuntarily. 

Ends

Making a good end to a charitable organization and its service is important for several reasons. First, federal tax laws and state corporations laws require it. Do it wrong, for instance by abandoning a charitable organization’s operations while leaving the corporate shell intact and assets at risk of misappropriation, and regulatory penalties and even civil liability can result. But ending a charitable organization responsibly also serves the organization’s donors, staff, volunteers, patrons, and community. Bad endings can leave patrons unserved, staff unpaid or without appropriate severance benefits, donors unhappy over misused donations, volunteers disappointed or angry, facilities in disuse or disrepair, and disputes to resolve with suppliers, landlords, and public officials. Do yourself, your organization, and your community a service. Make a good end of it. 

Dissolution

The state corporations bureau and IRS call dissolution, the orderly process of ending a charitable organization’s existence. In the eyes of the state corporations bureau, IRS, and law, your charitable organization has a life of its own, and your organization’s leaders have a duty to properly wind down that life in the dissolution process. Following an orderly dissolution process minimizes the harm and maximizes the gain from concluding the organization’s operations and life, by fulfilling its remaining obligations, extinguishing its debts, and distributing its net assets. Take charge or put a responsible administrator in charge of your organization’s winding down. Retain a lawyer familiar with charitable dissolutions if necessary, using the organization’s own resources to compensate the lawyer as an administrative expense of dissolution.

Steps

The steps for an orderly winding down can include the executive director’s study of and recommendation for dissolution, board deliberation and approval of dissolution, and notice to constituents including staff members, patrons, donors, suppliers, and landlords of the intention to dissolve and timetable for dissolution. An orderly cessation of patron service, separation and appreciation of volunteers, termination of program staff followed by facility and administrative staff, and termination of contracts should follow, including notice to creditors. The executive director and finance administrator, with board oversight, should ensure the preservation of organization assets, payment of organization debts, and sale or other appropriate liquidation of organization property and equipment. Final steps may include an accounting to the board of the payment of debts and the retention and value of remaining assets, and an executive director recommendation to the board for the transfer of remaining assets net of all obligations to a 501(c)(3) organization of similar mission in the same or nearby locale. Board approval of the final accounting of dissolution concludes an orderly process.

Alternatives

A charitable organization may have alternatives to dissolution or good options in the dissolution process. Often, whether in business or the nonprofit world, an enterprise has more value as a going concern than in its liquidation of assets. Your organization may find another 501(c)(3) organization interested in taking on your organization’s operation, to run the operation through its existing 501(c)(3) structure, in effect replacing the board with new board members aligned with the takeover organization. Alternatively, the takeover organization may receive a transfer of your dissolving organization’s operation, its assets, and its debts or obligations. In either case, the operation’s staff members, volunteers, and patrons may not change or may change only in part. Likewise, the operation’s identity may remain the same or may change to align with the takeover organization. Dissolving a charitable organization doesn’t necessarily mean ending its ministry. Explore takeover and transfer alternatives. Get skilled legal representation to accomplish the takeover or transfer lawfully and orderly.

Employees

Treat the organization’s staff members fairly in your organization’s dissolution. They may have the right to unemployment benefits, if having earned sufficient credits. Depending on the organization’s employment policies and each employee’s individual circumstances, the organization may owe employees reimbursement for expenses, payment of accrued vacation days, retirement-plan contributions, or similar obligations. Determine those obligations carefully, and confirm them with each employee while giving employees the opportunity to dispute and correct the determination. Offer references and recommendation letters where appropriate. Consider retaining or paying for a job-transition service. Consider offering modest severance pay, without leaving the impression of a misuse of donor funds and a golden parachute, or similar accommodations such as extra days off for personal job-transition business in the last weeks of employment.

Patrons

Treat the organization’s patrons and their needs thoughtfully. Give them enough notice of your organization’s termination of charitable services so that they can make alternative arrangements for meeting their essential needs. Research those alternatives, and share your recommendations with patrons, especially those who express a need for continued assistance. Invite other charities to meet your organization’s patrons with offers of assistance. But do not disclose patron identities or information without their permission. 

Volunteers

Treat the organization’s volunteers, and their commitment and service, sensitively and respectfully. If your organization’s board, executive director, or staff members recommend volunteer appreciation in a special form, such as an event, thank-you cards, or public recognition, then respect and act on their recommendations. Sometimes, it’s better to go quietly into the night, rather than stirring a hornet’s nest of recriminations. Other times, celebrations are the better conclusion. Gathering in memory and honor of volunteer service can help retain the commitment of volunteers to serve elsewhere.

Donors

Treat the organization’s donors and their donations with special sensitivity. Donors may be the first constituents with whom your board and executive director consult when considering dissolution. Donors may have additional funds or other proposals to continue the ministry, whether under the existing organization, in another form, or under another structure. Donors may also have expectations for how you treat the remainder and residue of their donations. Those donations are for the organization to dispose of as the law directs and the organization’s leaders determine. But donor advice and wishes may inform leader judgment and even trigger better judgments and decisions. Listening to donors can also avoid disputes with donors over the alleged misuse of funds. 

Finances

Treat the organization’s finances in dissolution with special care. Keep clear records of remaining deposits, account balances, payments, bills, and outstanding obligations. Plan the application of remaining account balances and proceeds of property liquidation. Pay classes of creditors in proper priority, not by favoring one creditor over another when the proper priority dictates otherwise. Aside from direct dissolution administrative expenses, including retaining a lawyer or accountant to assist in the dissolution process, priorities may be to pay employee compensation, employee reimbursement, and outstanding tax obligations first, then release security to secured creditors, and then to pay unsecured creditors. Retain sufficient funds through the process to complete an orderly dissolution, including such things as keeping the executive director paid, lights on, and essential heating, cooling or water services running, until the process concludes. Make and retain a final accounting.

Facility

The terms and conditions of vacating your organization’s facility depend on whether your organization leased or purchased the facility. In the case of a lease, give proper notice of lease termination according to the lease terms, if possible. If your organization must breach the lease, then negotiate a workout with the landlord if possible. Your organization’s landlord may be willing to forgo unpaid rent after abandonment. Landlords may also have a duty to mitigate damages, such as to lease the property to another tenant if possible. Your organization’s notice of lease abandonment or termination gives the landlord that opportunity. If, instead, your organization owns the premises, then it should arrange responsibly for fair market sale, to realize as much proceeds for the organization as possible, to apply to remaining debts or to transfer to another 501(c)(3) organization after payment of all debts. In either event, also vacate the premises responsibly, without leaving behind worthless property or garbage, even if doing so requires the organization to spend sums in clean up. 

Property

Liquidate furnishings, equipment, inventory, or other personal property at fair market value, to apply the proceeds to organization debts or to transfer the proceeds to another 501(c)(3) organization. If all organization debts are paid, then transferring the property to another 501(c)(3) organization may be an option rather than liquidating the property and transferring proceeds. Do not give away personal property of value to private individuals. Doing so violates the public trust the organization owes in disposing of organization assets. Also consider whether the organization owns intellectual property of value, such as copyrighted publications, trademarked designs, or proprietary processes. Treat that intellectual property in the same way you treat the organization’s personal property.

Reporting

The state nonprofit corporation act under which you incorporated your charitable organization will likely require that your organization file its certificate of dissolution. A certificate of dissolution notifies the public that your organization is winding up its affairs and will no longer continue operations. Dissolution requires a resolution of your organization’s board. Be sure to introduce and approve that resolution, and document its passage in a signed and written form, and in the board’s meeting minutes. Have the organization’s president sign the resolution confirming its board approval and the organization’s secretary sign the minutes to confirm their accuracy. Your state’s nonprofit corporation act may require your organization to obtain a letter of consent from the state attorney general for your charitable organization’s dissolution. See, for example, the state attorney general dissolution questionnaire at the end of this guide. Consult a knowledgeable attorney if you have any doubt as to your state’s specific dissolution requirements. Also, indicate the termination of your organization’s operations on the last e-postcard or other information return that your organization files with the IRS.

Remainders

A perfectly-planned and executed dissolution process would leave zero dollars in the organization’s bank account, with all assets disposed of and all debts paid. But dissolutions are rarely if ever perfect. They typically leave some assets remaining or some debts unpaid. The purpose of the process is to balance accounts out as far as able. No debt should remain unpaid if assets remain to pay it. No asset should remain undisposed if a debt remains to absorb it. If assets do remain, though, your organization has the federal tax law obligation to convey those assets to another 501(c)(3) organization with the nearest purpose to your organization’s purpose. If, instead, debts remain unpaid, then your organization should be able to clearly show to the unpaid creditors that your organization’s dissolution process was orderly and did not unduly or unlawfully favor creditors or anyone else. Keep creditors informed as to the status of their claims for payment. Try to negotiate discounted payments or forgiven obligations where possible, rather than have the dissolved organization simply walk away from unpaid debts. Corporate debts are generally the responsibility of the corporation, not its officers, directors, or employees. Yet unpaid obligations can leave a bad taste and hard feelings, not just toward the corporation but also toward its controlling officials.

Evidence

Retain a record of your organization’s dissolution process. Compile a print notebook or keep an electronic folder with all key dissolution documents including notices, confirmations, accounting records, board resolutions, state certificates, and other records. Retain that notebook or electronic folder in a secure location in perpetuity, as a resource to respond to demands, disputes, or inquiries regarding the organization’s dissolution. You’ll rest easier not only when you know you did things right but also when you have reliable records of having done so.

Key Points

• Charitable organizations can have life cycles leading to dissolution.

• End your charity’s operations lawfully, sensitively, and responsibly.

• The board resolves to dissolve on executive director recommendation.

• Follow orderly steps for dissolution as to each constituent group.

• Treat employees fairly as to notice, pay, benefits, and references.

• Notify patrons timely and help them find alternative resources.

• Notify volunteers and appreciate and celebrate their service.

• Consult donors before deciding on dissolution.

• Terminate contracts and leases responsibly.

• Plan for the orderly vacating and sale or return of the facility.

• Preserve and liquidate assets to apply to debts.

• Obtain attorney general consent to file a dissolution certificate.

• Indicate dissolution on the organization’s final IRS information return.

• Transfer remaining assets or proceeds to a like 501(c)(3) organization.

• Retain evidence of your organization’s orderly dissolution.