While it may be a tough decision, some non-profit organizations reach a point where it makes sense to wind down. Continuing an organization may not be feasible or the organization may no longer be able to accomplish its purpose. It is important to be aware of the process when making this decision because dissolving a nonprofit entity can be notably more complex than dissolving a for-profit entity.
There are many reasons why a non-profit organization may need to close down. The need to dissolve could arise from a loss of funding, departure of key staff, or a declining economy. Regardless of the reason, it is important to be aware of the process when making this decision. The following steps are specific to dissolving a nonprofit corporation organized and operating in California.
Step 1 – The organization must decide to dissolve.
For an entity organized as a corporation, this is accomplished through a vote of the board members. Once the board votes, the entity’s activities should only be those required to wind up and dissolve.
Step 2 – Verify current status with the Franchise Tax Board.
This step is often missed. An organization’s status must be current in order to dissolve. If its status is suspended, it will need to take action to become current prior to dissolving. Otherwise, the dissolution will be denied.
Step 3 – Obtain a waiver from the Attorney General.
Since a non-profit organization has been given stewardship over funds that have been permanently earmarked for a charitable purpose, the Attorney General requires the organization to ensure that its remaining assets are dispersed for a charitable purpose. The Attorney General will respond with a waiver approving the organization’s plan for dispersing its assets.
Step 4 – Distribute assets.
The organization must distribute assets in accordance with the plan proposed in Step #3. This can include paying the organization’s liabilities, expenses related to the dissolution, and dispersing funds to other organizations with 501(c)(3) tax exempt status.
Step 5 – Submit dissolution paperwork to the Secretary of State.
The organization must submit Secretary of State forms as well as the Attorney General waiver obtained in Step #3. The Secretary of State will then respond with approved or “filed” dissolution forms.
Step 6 – Submit final paperwork with the Attorney General.
The approved dissolution forms obtained from the Secretary of State will then need to be sent to the Attorney General along with a final financial report showing that all assets were distributed properly.
Step 7 – File final tax returns.
The organization’s final tax returns will be due to the IRS and FTB within 4 months and 15 days of the date of dissolution. These returns will report the final activity that occurred prior to dissolution as well as the final distribution of all assets.
This entire process can be complicated and lengthy. If you are considering a dissolution, contact your L&B professional for more information.