It's the last thing you want to do, but sometimes it's better to close your charity. Many charitable nonprofits close their doors annually. Usually, it is voluntary because money or resources run out or the mission becomes outdated. Fortunately, many organizations have taken this path, and there are clear guidelines and procedures to guide the process.
Reasons for Shutting Down Your Nonprofit
Nonprofit organizations close for several reasons. Perhaps, happily, your mission has been accomplished, your mission may have become outdated, or another nonprofit offers a merger that requires that one of you close down your operations.
In a less happy situation, you may have just run out of resources to do what you intended. During economic downturns, many charities can't overcome the loss of donors or federal and foundation grants.
Sometimes, a nonprofit's dissolution is involuntary. Perhaps it did not file the required 990 (annual tax form) and lost its Internal Revenue Service (IRS) exemption. Although rare, an organization may have done something illegal and has to be dissolved.
Why Nonprofits Shut Down Voluntarily:
- They have completed their mission, or their mission has become irrelevant.
- They no longer have the resources to survive.
- They wish to merge with another nonprofit with a similar mission.
Why Nonprofits Shut Down Involuntarily:
- They have broken the law and/or have lost their 501(c)(3) exemption from the IRS.
- They must declare bankruptcy.
Sometimes, there may be options other than closing a nonprofit. They include:
- Reorganizing under bankruptcy law
- Merging with another nonprofit or transferring assets to another nonprofit
- Becoming an affiliate of a larger nonprofit
- Converting to another form of business that includes a social purpose such as a B Corporation
It's never easy to decide to close a nonprofit, but there is plenty of help to guide you through the process when it must be done.
Steps to Close Your Organization
Closing a nonprofit charity requires several steps. The process may take one or several months. In the case of a complex shutdown or merger, the timeline could be much longer.
The organization's bylaws will have a dissolution clause, set up at the time of organizing and required by the IRS to achieve 501(c)(3) status. Following that predetermined procedure, the board and staff should prepare a statement of dissolution and a plan for dissolution outlining the steps and a timeline.
If the closure is voluntary, it can be done through a vote by the board of directors, or, by the board and a vote by the membership if it is a membership-based nonprofit.
The nonprofit corporation files articles of dissolution with the secretary of state, where it is incorporated. States typically provide instructions for these cases.
In the case of involuntary closure, the secretary of state or the attorney general of the state where the nonprofit is incorporated initiates the dissolution.
The board of a nonprofit can also petition the court to order an involuntary closure if its board deadlocks over the decision or if the organization has not been active for some time.
Once the decision has been made to dissolve, the nonprofit must stop transacting business, except to wind down its activities.
Any remaining assets must be used to pay debts and liabilities. If assets remain after paying debts, the nonprofit (if it is a 501(c)(3)) must distribute them to another 501(c)(3) organization or the government.
The assets of a charitable nonprofit can only be used for exempt purposes. This means that assets may not go to staff or board members.
Distribution of assets requires that the organization find other charities or exempt entities that will accept the assets. All of that information is reported on IRS Schedule N, including a list of assets, their value, and the names of the exempt entities to whom they will be transferred.
What to Do and When
Most experts recommend that the following steps be taken in the event of closure. Notice that many of these actions involve the stakeholders of your nonprofit, from staff to suppliers. The order of these actions depends on your dissolution plan.
- Hold a board meeting and vote on the dissolution: Record that decision in the board minutes.
- Notify employees: Let your employees know about the impending shutdown. Include information about health insurance, pensions, unused vacation pay, and unused sick days. If possible, provide job counseling and severance pay.
- Take care of clients: Make sure that your customers are taken care of. Perhaps they can be referred to another nonprofit. Subscribers or members can be given refunds. Fees for unused services should be refunded.
- Inform donors: Let your donors know what is happening. Inform donors how any remaining funds will be used. Will they go to pay debts? Will they go to another nonprofit? Will you refund recent donations? Work with an accountant to identify and dispose of funds that were restricted by donors. If your organization has registered in other states to fundraise, cancel those registrations and pay any taxes or fees due.
- Inventory all assets: These assets include money, furniture, web domains, property, and mailing lists. Determine disposition.
- Pay debts: Either pay your outstanding debts or work with your suppliers to settle those debts. If debts outstrip remaining funds, consider declaring bankruptcy and work with an attorney to file.
- Document the life of your nonprofit: Write down what your nonprofit has done, its history, its research, and any knowledge gained. Give the documentation to a library or historical society. Or pass it on to other nonprofits that might benefit from your experience.
- Honor staff, board, and volunteers: Give them credit and thank them. Inform staff of their rights regarding retirement funds, health insurance, unemployment compensation, and any job transition services you might offer by contracting with another organization.
- File a formal intent to close with your state : This is usually filed with the Secretary of State office.
- Submit a final Form 990 tax return with the IRS: You must submit this form within four months and 15 days of terminating your organization.
The Bottom Line
It is never easy to close down a beloved charity, but when it must be done, make the process as smooth as possible for all involved. Maintain transparency with all stakeholders and make sure to check all of the legal boxes required. Work with an attorney and an accountant. Hopefully, your shutdown will be under favorable circumstances, and your organization will leave a legacy of which everyone can be proud.
- National Council of Nonprofits. "Dissolving a Nonprofit Corporation."
- Nonprofit Kit for Dummies, Stan Hutton and Frances Phillips, Wiley 2016.
- Starting and Managing a Nonprofit Organization: A Legal Guide, Bruce R. Hopkins, Wiley, 2017.
- How to Form a Nonprofit Corporation (National Edition): A Step-by-Step Guide to Forming a 501(c)(3) Nonprofit in Any State, Anthony Mancuso, NOLO, 2019.