A nonprofit corporation is a unique type of business entity because its goal isn’t to make a profit – instead, revenue is donated in a way that will provide value to the general public.
Unfortunately, nonprofit corporations must sometimes come to an end. This situation may arise because of a merger with another organization, or it may happen when the corporation is going out of business entirely. Whatever the reason for the closing of a nonprofit, the process to officially dissolve the business will vary from that of a for-profit business. Rather than distributing assets to shareholders, they must be transferred to another, comparable nonprofit organization.
Follow these steps to officially dissolve a nonprofit corporation:
1. Hold a vote for dissolution with board members.
To officially dissolve a nonprofit corporation, you must first hold a vote with the board of the organization. The board needs to reach an agreement so that official corporate action can be taken. This will typically involve approving a plan of dissolution. The results of the vote and any other decisions made by the board should be taken down in writing.
2. File Articles of Dissolution.
The proper paperwork needs to be completed for the official dissolution of your nonprofit corporation. This paperwork typically involves Articles of Dissolution filed with the state agency that processes corporate registrations). This critical paperwork informs the state(s) in which your corporation operates that you’ll no longer be doing business.
Once you’ve filed Articles of Dissolution, state officials will mark the paperwork as filed and return them to your official business address.
It’s important to file Articles of Dissolution prior to submitting final paperwork to the IRS, as the IRS will ask for an approved copy of the Articles of Dissolution along with your Form 990.
3. File a Form 990 with the IRS.
Form 990 is a final annual report that nonprofit corporations must file with the IRS in the case of dissolution. It’s important to file this form because it keeps the IRS from considering the corporation active and imposing further taxes on it.
There are three separate versions of Form 990. The form you need will be determined by your gross earnings for the fiscal year of the dissolution, as well as the extent of your assets. A 990-N form can be used by nonprofits with gross receipts totaling $50,000 or less. A Form 990 EZ can be used by nonprofits with gross receipts totaling less than $200,00, as well as total assets under $500,000. For nonprofits with $200,000 or more in gross receipts and assets totaling $500,000 or more, a Regular 990 Form should be used.
When you file a Regular 990 Form or a Form 990-EZ, be sure to check the box reading “Final return/terminated”.
4. Notify state authorities of the dissolution.
After the necessary paperwork has been filed, you’ll need to contact certain state offices of the closing of your nonprofit. This typically includes the state Attorney General. Your state Attorney General’s office may require copies of the Articles of Dissolution and the Form 990.
If your nonprofit operated with licenses or had employees, you may also need to contact the state department of labor and state licensing offices or authorities. This ensures that your corporation is marked as no longer operating in all of the state’s records.
5. Distribute remaining assets to a different tax-exempt entity or the government.
As aforementioned, nonprofit organizations don’t operate to make a profit. So, when a nonprofit corporation is dissolved, the remaining assets don’t go to shareholders. The assets also can’t be transferred to volunteers, employees, or individuals who were served by the organization. Legally, the nonprofit must transfer all remaining assets to another tax-exempt organization or to a federal, state, tribal, or local government. If the assets are transferred to another organization, not a government, that organization must have a tax-exempt public charity designation.
The process of dissolving a nonprofit corporation can seem complicated. But, if you properly follow each step required for the official dissolution of a nonprofit, you can wrap up the business in as little as 30 to 60 days.