The founders and shareholders of nonprofit organizations often feel a personal attachment to the work the organization performs. Closing a nonprofit is usually the last thing people want to do. However, sometimes it’s necessary due to shortages of money and resources. Closing a nonprofit can often feel more intimidating than starting one.
If you are considering closing the doors at your nonprofit, you’ve come to the right place. We are here to outline the most efficient ways to close your charitable organization. It’s important to remember that you and your organization are not failures just because circumstances didn’t work in your favor. Let’s take a look at the steps of how to close down a nonprofit organization properly.
Why Nonprofits Shut Down
Each year, many nonprofits shut down for a variety of reasons. Sometimes missions become outdated or irrelevant, or organizations run out of money and resources. Sometimes closures can be happy, like when an organization feels it has genuinely accomplished what it set out to do. However, most other instances involve sadness and frustration.
The two main ways nonprofits close are voluntarily and involuntarily.
Examples of voluntary shutdowns:
- The nonprofit’s mission was completed or became irrelevant.
- The organization no longer has the resources needed to stay afloat.
- The organization wishes to merge with another similar nonprofit.
Examples of involuntary shutdowns:
- The organization has broken the law.
- The nonprofit needs to declare bankruptcy.
- The organization has lost its 501(c)(3) IRS exemption.
Usually, the board of directors votes on whether or not to close the organization. In the case of involuntary closures, the secretary of state or attorney general of the state initiates the dissolution. If the board of directors cannot reach a decision, or if the organization has been inactive for a while, the board can petition the court to order an involuntary closure.
If you need to involve the court with your nonprofit closure, be sure to collaborate with an attorney who is knowledgeable about nonprofits. The right legal partner can make all the difference when it comes to navigating confusing court cases.
1. Make a Plan for Dissolution
After you hold a meeting and allow the board to vote on the dissolution, it is time to create a closure plan. The dissolution plan should be written down in a formal document easily accessible for the board of directors. The plan should be realistic, strategic, and it must cover all principal areas of the process.
Develop of feasible timeline in your original plan. Start with the target date of your closure, and work backward from there.
Be sure to notify all employees about the pending closure immediately. Outline how employees can use or receive compensation for pensions, health insurance, and unused vacation and sick days. If possible, include job counseling and severance pay in your dissolution plan.
2. Inform Stakeholders and Donors
Once you’ve made a plan and informed your employees, you will need to notify all other essential participants of your nonprofit. The planning committee should identify all the individuals and groups who need to be informed. Decide how you want to relay the news. Should it be through email, mail, or a phone call?
Inform donors how any of their remaining funds will be used. Some examples of how to use remaining donation funds include:
- Pay off debts
- Donate to another nonprofit
- Refund the donation
Suppose your organization has outstanding restricted donations designated and allowed only for a specific use. In that case, you will need to work with an accountant to identify the funds and create a disposal plan.
Plan for response time during this portion, as many people may ask questions or express concerns.
3. Distribute Assets
After all the essential people in your organization are notified of the pending closure, it’s time to handle your assets. First, you will need to take inventory of all your nonprofit’s assets. Assets can include:
- Mailing lists
- Web domains
- Electronic devices
After the inventory is taken, you need to distribute your assets. Most commonly, nonprofit assets are distributed to staff members, the board of directors, or other organizational participants.
Many states also require an organization’s assets to get distributed to other governmental or charitable entities. These laws ensure that any assets obtained for charitable purposes continue to be used for similar reasons.
Many nonprofits choose to preserve their legacy by distributing existing community programs to other organizations. This practice may also help keep some staff members employed.
4. File Legal Paperwork
As you make more strides towards moving out and closing the doors of your nonprofit, it is vital to file all necessary legal paperwork. The first step usually involves filing articles of dissolution with the office of your state’s attorney general or secretary of state. Then, the office issues a public notice.
Just like how you needed to register with the IRS to create your nonprofit, you will need to file with the IRS to close it down. Within four months and 15 days of closure, you must file a Form 990 tax return with the IRS.
Check the “termination” box on the first page of Form 990, and answer “yes” to the question on line 36 about whether your organization “liquidated, terminated, dissolved, or substantially contracted.”
Legal documents can get confusing and overwhelming for many people, especially when you’re already overwhelmed with the emotions that come with closing a nonprofit. An empathetic attorney can help you navigate the legal aspects of nonprofit dissolution.
5. Recognize Accomplishments
When your nonprofit officially closes its doors and halts operations, don’t forget to celebrate your successes. Opening a nonprofit is challenging, but the work is rewarding. Take time to thank all of your staff members, donors, and stakeholders for their gifts, talents, and support.
Reflect on all the people and efforts your organization positively impacted. Just because it came time to close your doors does not mean your nonprofit failed its mission.
Ask For Help When You Need It
Not only is closing down a nonprofit emotional, but it’s also complicated and time-consuming. You don’t need to deal with the pressure all by yourself. If it’s time for your nonprofit to close its doors for good, reach out to Lotus Legal today. Our caring and empathetic attorneys have many years of experience working with nonprofit and charitable organizations.