10 Steps to Closing Your Nonprofit Organization
Why Nonprofits Close
It's the last thing you want to do, but sometimes it's better to close your nonprofit.
Nonprofit organizations close for several reasons. Perhaps, happily, your mission has been accomplished, On the flip side, your mission may become outdated. Either way, the board may decide to shutter your doors. It may be that another nonprofit offers a merger that requires that one of you close down your operations.
Or, least appealing, you have just run out of resources to do what you intended to. During the last great recession, many charities simply could not buck the loss of donors, federal income, or their grant money ran out.
Sometimes, a nonprofit's dissolution is involuntary. Perhaps it did not file the required 990 (annual tax form), or pay state taxes which it owed. Although rare, sometimes the organization has done something illegal and has to be dissolved.
Just like any business, a nonprofit can be vulnerable to any number of situations that force it to close. But closing a nonprofit charity requires a few more steps when it goes out of business.
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. 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 been inactive 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 501c3) must distribute them to another 501c3 organization.
Actions You Must Take and When
Most experts recommend that these steps be taken in the event of closure:
- Notify employees. Let your employees know about the impending shutdown. 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.
- Inform donors. Let your donors know what is happening. Do this before they find out from the rumor mill or in the news. 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?
- 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. Although creditors cannot force a nonprofit into bankruptcy, the board can choose to declare chapter 11.
- Document the life of your nonprofit. Write down what your nonprofit has done, its history, its research, 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.
- Hold a board meeting and vote on the dissolution. Record that decision in the board minutes.
- Inventory all assets, such as money, furniture, web domains, property, mailing lists, etc. Then pass them on to another nonprofit, sell them and use the proceeds to pay your bills, or return them if appropriate.
- File a formal intent to close with your state (usually the Secretary of State office).
- Submit a final form 990 tax return with the IRS within four months and 15 days of terminating your organization.
- Bonus Step (hat tip to Maia Lee of Affinity Fundraising Registration)
- Withdraw any existing state charitable solicitation registrations. In many states, a terminal filing is required. If any solicitation by the organization occurred in that last year of operation, the nonprofit needs to report its final 990 and anticipate additional expenses even after it has dissolved.
Nonprofit Kit for Dummies, Stan Hutton and Frances Phillips, Wiley 2016. Buy from Amazon
Starting and Managing a Nonprofit Organization: A Legal Guide, Bruce R. Hopkins, Wiley, 2013. Buy from Amazon
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, 2015. Buy from Amazon