The decision to dissolve a nonprofit can come for many reasons. An organization may lose a major funding source, struggle to recruit board members, see declining demand for its programs, or reach a point when continuing operations is no longer sustainable.
Whatever leads to the decision, timing matters. Dissolving a nonprofit can be a lengthy process, and the organization will still have financial, legal, and reporting responsibilities while operations wind down. Starting the process while sufficient resources remain gives the board more options to meet those responsibilities and protect the charitable assets entrusted to the organization.
Start with the organization’s finances
Before moving forward with dissolution, the board needs a clear understanding of the organization’s current financial position.
As a general benchmark, an organization with less than 120 days of operating funds and no additional funding expected should carefully consider whether it has enough resources to continue operating. If dissolution becomes necessary, the organization will still need money to make payroll, pay bills, and cover other expenses while completing the process.
The board should identify outstanding liabilities, including leases, contracts, vendor agreements, employee obligations, and other expenses that must be resolved. Dissolution does not eliminate those obligations, and waiting until cash flow becomes critical can make winding down the organization more difficult.
The source of the nonprofit’s funding also matters. State and federal grants may limit how funds can be used and require unused money to be returned. Restricted donations must continue to be used according to donor intent. Money given to support a specific program or purpose cannot be redirected to cover closing costs simply because the organization needs additional operating funds.
Prepare for final reporting and record retention
A nonprofit’s reporting responsibilities can continue after operations end. The organization must file final tax returns and meet any remaining reporting requirements tied to its funding.
The board should also have a plan for retaining financial and organizational records. Organizations that received state or federal funding may need to preserve records for several years in case of an audit.
Before the organization closes, the board should determine which records to retain and how they will remain accessible when no office or staff manages them.
Make a plan for remaining assets
Once the organization understands its liabilities, the board can determine what will happen to any remaining assets.
Donor intent continues to apply when a nonprofit dissolves. If money, property, or other assets were given for a particular charitable purpose, those restrictions do not disappear when the organization closes. The board may need to identify another nonprofit with a tax-exempt purpose that allows those assets to continue serving as intended.
The same care should be taken with physical property. Computers, equipment, furniture, and other assets belong to the nonprofit and should be included in the organization’s distribution plan rather than informally given to employees or board members.
Documentation is an important part of this process. The organization should be able to show what happened to its remaining assets and provide documentation from the receiving organizations.
Complete the Attorney General review process
In Oklahoma, the Attorney General reviews the proposed dissolution and distribution of charitable assets. The organization must provide information about its tax-exempt purpose, the decision to dissolve, its remaining assets, and where those assets are proposed to go.
Supporting documentation includes the nonprofit’s articles of incorporation and bylaws, minutes documenting the vote to dissolve, its two most recent tax returns, and letters from organizations that have agreed to receive assets agreeing to follow donor intent.
During its review, the Attorney General may ask how the receiving organization’s tax-exempt purpose aligns with the dissolving nonprofit’s, how the receiving organization will address outstanding liabilities, and where remaining assets will go. The organization cannot distribute its assets until the Attorney General approves its dissolution plan.
Because that review can lead to additional questions or documentation requests, boards should account for that possibility when determining how much time and funding they will need to complete the dissolution.
Give the organization time to wind down properly
A board may decide that closing the organization is the right course of action, but completing that decision can take time. Outstanding contracts, restricted assets, property transfers, tax filings, and other unresolved obligations can all affect how quickly the process moves.
Starting early gives the organization time to address those issues while it still has the resources and personnel available to do so. Boards should also consider whether they have the capacity to manage the process internally and whether they should involve a nonprofit attorney and CPA as needed.
At Nonprofit Solutions Law, we help nonprofit boards understand their responsibilities and navigate the legal requirements involved in dissolving an organization. If your organization is considering dissolution, contact us to discuss your nonprofit’s circumstances and the steps involved in winding down responsibly.