Category: Nonprofit Posted on Apr 05, 2015

When Non-Profits Have to Close the Doors

After making the decision to close, nonprofit staff and board members may feel shame, guilt or anger. But, the hardest choice may be the best and bravest one. Even at the end of an organization’s life, failure to plan is planning to fail. If a merger is contemplated, it is important that discussions take place while the organization is a strong merger partner. And if a shut-down is inevitable, a timely decision allows for a graceful demise rather than a chaotic retreat.

Shutting down a nonprofit organization has many implications, both legal and operational. On the operational side, a graceful demise includes:

  • Transferring clients, programs and services to other organizations.
  • Retaining key staff to “turn off the lights”
  • Controlling public relations.
  • Communicating with funders and customers.
  • Leaving a legacy that maintains the reputation of the staff and board.

The legal side involves two steps, but these may occur concurrently. Formal Board Vote and Dissolution. Following the business decision to close, the board of directors must formally vote to dissolve and wind up the organization.

An organization (along with its lawyers) should:

  • Review the certificate of incorporation, by-laws and the state law to determine the dissolution process and proper voting requirements.
  • Identify an individual (often a key board member) who will act for the organization once the staff and board are gone, to “turn out the lights.”
  • Draft the necessary notices, resolutions and certificates.
  • Conduct the meeting of governing body (members and/or board of directors).
  • File with state regulatory authorities.
  • Determine what other steps may be appropriate under state law, such as notifying potential claimants in order to bar future claims.

Winding up the Financial Affairs of the Organization.

To liquidate its assets and wind up its financial affairs the organization should:

  • Maintain a Directors and Officers liability insurance policy. Purchase and pre-pay for a D&O “tail” for an appropriate period of time.
  • Communicate with funders honestly. A graceful demise takes time and money. If approached with care, some funders may provide transition funding
  • Establish appropriate reserves (and pre-pay) for legal and accounting fees, management and outplacement consultants (where appropriate) and the costs of winding-down.
  • Provide for the payment of claims. Pay vendors and other creditors in full if possible. If not, negotiate settlements with creditors. Chasing bad debts is costly, so some creditors may be willing to consider part of the debt as a donation.
  • If all else fails, be absolutely sure to pay the trust fund portion of payroll taxes, for which individuals can be personally liable.
  • Comply with all state and federal employment laws.
  • Review endowment and restricted gift documents to determine donor intent. In some cases, it may be necessary to involve the state Attorney General or the court in this process.
  • Decide where any remaining assets will go –these assets must be turned over to another 501(c)(3) organization. Involving the Board in this process generates goodwill that lasts after the organization is gone.
  • File a final 990 with the Internal Revenue Service.

Bruce Stanger

My litigation experience includes family law, divorce, product liability, construction law, professional negligence, shareholder disputes, legal malpractice, and general commercial litigation.