Learn how to dissolve a nonprofit company in your state.
Do you need to dissolve your California nonprofit corporation? Here’s a short rundown of the essential processes involved in dissolving and winding up a 501(c)(3) nonprofit company in California.
Table of Contents
Dissolution Authorization
To begin the process of winding up and dissolving your organization, you will need a resolution to wind up and dissolve. After receiving the resolution, California law allows for voluntary dissolution in one of three ways:
by action of your organization’s directors followed by a vote or other permission of the members; or, if your nonprofit does not have members, by a vote of the directors.
The first approach requires a majority of all nonprofit members to vote or cast a written ballot in order to be approved.
In the second procedure, the board will normally accept the resolution before submitting it to the members. The members then gather and vote on the dissolution.
In the third procedure, the dissolution is approved only by the board. This might entail unanimous assent or a majority vote, depending on the circumstances.
Make careful to accurately record the motion to wind up and dissolve, the votes of the directors, and, if required, the votes or ballots of the members. This information will be required for filings with the state and the IRS.
Certificate of Winding Up and Dissolution
After your organization has officially elected to wind up and dissolve, you must submit a Certificate of Election to Wind Up and Dissolve with both the Secretary of State (SOS) and the Attorney General (“forthwith”) (AG). The certificate must have the following information:
a statement that the company has voted to wind up and dissolve if the election was made solely by vote of members, a statement of the number of votes cast and that the election was won by a majority of all members if the election was made by the board and members, If the certificate is signed by a member or members, a statement that the signer or signers were authorized to execute the certificate by a majority of all members; and a statement indicating that the election was made by the board alone because there are no members.
The SOS website has a form for the certificate of election to wind up and dissolve (Form ELEC NP).
NOTE: You do not need to submit the certificate of election to wind up and dissolve if your election to dissolve is made by unanimous vote of your members, or by unanimous vote of your board if you do not have any members.
Winding Down
After your nonprofit has legally approved dissolution, it continues to exist merely for the purpose of taking care of some last issues that, together, are known as “winding up” the organization. The fundamental purpose of winding up is to pay off any obligations and then distribute any residual assets. In general, you may distribute money and property only after you’ve paid off all of your nonprofit’s obligations. In turn, after paying off obligations, a 501(c)(3) organization that is dissolving must transfer its remaining assets for tax-exempt reasons. In reality, this generally entails donating assets to another 501(c)(3) charity or organizations. Other asset distribution rules, such as returning lent things to the lender, may, nevertheless, apply.
In addition, when you begin winding up your nonprofit, you must provide written notification to all members who did not vote for dissolution, all known creditors and claims, and the AG.
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Attorney General’s approval
Whether or not your nonprofit has any leftover assets after all obligations have been paid, you must receive a letter from the AG that “either waives objections to the distribution of the company’s assets… or affirms that the corporation has no assets.” You must seek the letter by giving the AG the following documents:
a letter containing information about the intended recipients of any assets (or, if no assets remain, information about that fact), a copy of your certificate of election to wind-up and dissolve and/or a signed certificate of dissolution prepared for submission to the Secretary of State, copies of your nonprofit’s IRS Form 990 for the last three accounting periods, and an endorsed-filed copy of your nonprofit’s articles of incorporation, including any amendments.
You may find more thorough information on getting the waiver, including a basic guidance on nonprofit dissolution, on the AG website.
Certificate of Divorce
When you have completed the dissolution of your nonprofit, you must submit a certificate of dissolution with the Secretary of State (SOS). The certificate of dissolution must include the following information:
the name of your charitable organization
a declaration that the charity has been totally wound down and disbanded
a statement that all final returns required by the California Revenue and Taxation Code have been or will be filed with the California Franchise Tax Board; and a statement that the nonprofit’s known debts and liabilities have been paid or adequately provided for as far as the assets allow, or that the nonprofit has incurred no known debts or liabilities.
The SOS website provides a single downloaded document with blank forms for the certificate of dissolution (Form DISS NP), certificate of election to wind up and dissolve (Form ELEC NP), and extensive instructions.
Remember that you must first send to the AG, together with other papers, a signed copy of the certificate of dissolution (and/or certificate of election to wind up and dissolve). When you’ve done winding up, including correctly dispersing any residual assets, you must submit the original and two copies of your certificate of dissolution, as well as the original and two copies of your AG waiver, with the SOS. The SOS will give you a stamped copy of the certificate of dissolution when they have approved your file.
Submission to the Attorney General
You must send a final dissolution package to the AG to finalize the closure of your organization. The package should include (a) a copy of the stamped certificate of dissolution you obtained from the SOS, as well as (b) the last financial report for your organization, which should indicate correct distribution of all assets and a zero balance.
Note on Federal Taxation
You must submit IRS Form 990 or IRS Form 990-EZ for federal tax reasons. A completed Schedule N (Liquidation, Termination, Dissolution, or Significant Disposition of Assets), as well as copies of your certificate of dissolution and resolution to wind up and dissolve, must be included. When filling out Form 990 or Form 990-EZ, tick the “Terminated” box in the header section on Page 1 of the return.
Dissolution Procedure Simplified for Certain Eligible Nonprofits
Nonprofits in certain restricted conditions may be eligible to dissolve utilizing a simplified dissolution method available in California as of January 1, 2016. The Domestic Nonprofit Corporation Short Term Certificate of Dissolution is only available to nonprofits that were “formed in mistake” and have been in operation for 24 months or less (Form DSF NP). The individual submitting the certificate must be able to say the following:
the certificate of dissolution is being filed within 24 months after the corporation’s articles of incorporation were filed; the corporation does not have any outstanding debts or other liabilities, other than tax liabilities, and all existing tax liabilities will be satisfied or be assumed by another individual or entity;
A final franchise tax report has been or will be submitted with the Franchise Tax Board; the business’s known assets have been dispersed as required by law after settling any known debts or obligations; and the corporation was formed in mistake.
Further Information
Additional information, including as forms, postal addresses, phone numbers, and filing costs, may be found on the SOS and AG websites.
This article only covers the most fundamental procedures of voluntary dissolution once your organization has begun operations. There are several further, more specialized regulations that address topics such as:
uninvited dissolution
dissolution of unusual nonprofits (for example, mutual benefit corporations)
providing adequate prior notice of member and director meetings submitting final state tax filings petitioning a court rather than filing a certificate of dissolution
how to dispose of known claims against a nonprofit by written notification; and how to react to allegations against the charity following dissolution.
Furthermore, your articles of incorporation or bylaws may incorporate restrictions that apply instead of or in addition to state law. You are highly advised to speak with a lawyer for further information on these and other issues.