How to Dissolve a California Nonprofit
Nonprofit, taxexempt organizations often need to dissolve for a variety of reasons.
Nonprofit, tax-exempt organizations often need to dissolve for a variety of reasons perhaps they have lost their major funding source, or the charismatic leader of the organization has moved on, or they have slowly stopped their programmatic activities due to changed circumstances. Note that the ultimate responsibility for the managing and executing the dissolution process resides with the Board and senior management. The following is a step-by-step guide for Boards to use in moving through the dissolution of a California nonprofit public benefit corporation.
Evaluate whether dissolution is truly the right path for the organization.
The Board must first enter into discussions as to whether dissolution makes sense for the organization. It should identify the reasons why dissolution is on the table and systematically address alternatives that may keep the organization in existence. These might include:
- Restructuring and Downsizing
- Merging with Another Organization
- Changing Leadership
This is important not only to the organization’s integrity but also to ensure compliance with each Board Member’s duty of care. While these discussions occur, it is generally advisable to keep the decision process private so as to keep as many options on the table as possible before making any public announcements.
Develop a Plan of Dissolution
If the Board decides that dissolution truly is the best option for the nonprofit, but before taking the legal step of officially voting to dissolve, the Board and Senior Management should undertake an intensive process of planning how the dissolution will unfold.
- Review the Articles of Incorporation and corporate Bylaws to determine any restrictions in those documents on the dissolution process. The Board should determine the Board voting requirements for dissolution, whether there is a voting membership that needs to approve dissolution, and what restrictions exist on the distribution of assets of the corporation.
- Review the existing assets and liabilities of the corporation. The Board should request its Treasurer or bookkeeper produce a current balance sheet of its assets and liabilities. Federal and state law generally require the organization to distribute to another nonprofit taxexempt organization any assets remaining after payment of liabilities. The Board should identify other nonprofits for distribution of funds and assets and consider whether certain programs could be transferred to those organizations for continuance. As part of this process, the Board may need to provide for the liquidation of certain assets, such as real or personal property, so that it can make distributions in cash. If there are not sufficient assets to cover liabilities, the organization may wish to hire legal counsel to assist in negotiating settlements with creditors.
- Identify parties affected by the dissolution and decide on a plan to notify these parties of dissolution and address any relevant outstanding issues. Affected parties may include staff and volunteers, members, creditors, community stakeholders, customers, clients, and served groups. The Board should develop a schedule of notification tailored to each group and a mechanism to address questions and concerns that will inevitably arise once dissolution is announced.
This Plan should be developed into a formal document, ideally with the assistance of legal counsel, to be adopted by resolution of the Board. In addition, at this time, the necessary legal documents should be prepared so that the next steps can be swiftly made.
Adopt Resolutions Electing to Wind Up and Dissolve
Once the Plan is fully developed, the Board should meet to formally resolve to wind up and dissolve the corporation and to adopt the Dissolution Plan.
- If the nonprofit has a voting membership, the membership will also need to approve dissolution. This approval request should be accompanied by an appropriate announcement.
- If all members unanimously approve dissolution, or if the nonprofit has no members and the Board unanimously approves dissolution, a majority of directors needs only to sign a Certificate of Dissolution.
- Otherwise, a Certificate of Election to Wind Up and Dissolve must be signed by the appropriate directors, member or officers in accordance with the instructions.
Once the dissolution is approved, the Board retains its authority but must cease all activities other than those necessary to wind up and dissolve the corporation. Although programmatic and fundraising activities generally must cease, California law does allow the Board to maintain certain operations to preserve the corporation’s “goodwill or going concern value” of the nonprofit corporation.
File a Certificate of Election to Wind Up and Dissolve with the Secretary of State, if applicable
See above at #3 to determine whether this is necessary.
Notify all Creditors and Claimants of Dissolution
The notice makes creditors and claimants aware of the dissolution and provides them an opportunity to file claims against the organization. If the notice provides a deadline for claim submission (which it should), the deadline must be at least 120 days from the effective date of the written notice. Once this deadline is met, the nonprofit will be able identify and pay its existing debts. A good notice template is available here at Attachment B.
Notify the California Attorney General
The Board must then seek a written waiver of objections from the Attorney General of the nonprofit’s proposed distribution of assets. Transfers of assets inconsistent with the stated purpose of the nonprofit in its Articles of Incorporation are subject to objections by the Attorney General. To request a waiver, the Board or its attorney must send to the Attorney General’s Office:
- A letter detailing all individuals or groups who will receive the nonprofit
- A signed copy of the Certificate of Election to Wind Up and Dissolve and/or a signed Certificate of Dissolution prepared for submission to the Secretary of State;
- A copy of the nonprofit’s IRS Forms 990/990EZ/990PF for the last three accounting periods; and
- An endorsed-filed copy of the nonprofit’s Articles of Incorporation, including any amendments.
Distribute Assets according to AG letter
Once the nonprofit receives a written waiver from the Attorney General, the Board can go ahead and distribute remaining assets to the tax-exempt nonprofit corporations listed in its letter. The Board, at this point, should be near completion in winding-up its affairs.
File a Certificate of Dissolution with the Secretary of State
This certificate of dissolution must be accompanied by the Attorney General’s written waiver letter. Do not forget to request the Secretary of State to return a certified copy of the dissolution certificate to the nonprofit.
Notify the Registrar of Charitable Trusts
Once the nonprofit has the certified copy of the Certificate of Dissolution, the Board must send a copy to the Registry of Charitable Trusts at the California Attorney General’s office along with a final financial report for the corporation showing that all assets were distributed and there is a zero balance.
File final state and federal information returns
As part of this process, the Board must also make arrangements to pay any outstanding taxes and file final returns. The final federal 990 series return must be filed with the Internal Revenue Service by the 15th day of the 5th month after dissolution.