Learn how to dissolve a nonprofit company in your state.
Here’s an outline of the basic processes of closing down a nonprofit company. This article solely discusses the most fundamental kind of voluntary dissolution of an existing Kentucky 501(c)(3) nonprofit company. Other forms of nonprofits have distinct regulations and processes, as do other circumstances such as forced dissolution.
Table of Contents
Dissolution Authorization
Closing begins with dissolution, and you will need a determination to dissolve to do so. You’ll also need a distribution plan, which outlines how the nonprofit’s leftover assets will be allocated once all creditors have been paid. With a resolution and a strategy in place, Kentucky law allows for voluntary dissolution in the following ways:
If your nonprofit has members, by action of the directors followed by a vote or other permission of the members; otherwise, by a vote of the directors.
The board must first approve the resolution to dissolve and then present it to the members under the first approach. Members then gather and vote to adopt the resolution. Members may also grant unanimous written approval for the resolution. The process for approving a distribution plan is roughly the same.
The board must adopt the resolution to dissolve under the second approach. In general, the resolution must be passed by a majority of the directors who are in office at the time. The method for approving a distribution plan is the same.
Make careful to accurately document the decision to dissolve, the plan of distribution, the votes of the directors, and, if required, the votes or written consents of the members. This information will be required for filings with the state and the IRS.
Creditors’ Notice
After passing the resolution to dissolve, you must “immediately” send notice of the planned dissolution to all known creditors of your organization.
Winding Down
After your nonprofit has legally approved dissolution, it continues to exist simply to handle some last tasks known collectively as winding up the firm. Winding up is primarily concerned with paying off any obligations and then distributing any leftover assets, although additional responsibilities may be included.
In general, you may distribute money and property only after you’ve paid off all of your nonprofit’s obligations. Then there are certain regulations to follow when it comes to asset distributions. For example, your nonprofit is required to return any things leased to it on the condition that they be returned upon dissolution. A dissolving 501(c)(3) organization must also disperse its remaining assets for tax-exempt purposes after paying off obligations and repaying borrowed assets. In reality, this generally entails donating assets to another 501(c)(3) charity or organizations. Other distribution criteria, such as those found in your articles of incorporation, bylaws, or plan of distribution, may also apply. If you have any concerns, you should speak with a lawyer.
Dissolution Articles
You must submit articles of dissolution with the Secretary of State after you have paid and discharged all obligations and legally transferred any residual property—in other words, once you have completed winding up your organization (SOS). The articles of dissolution must include the following:
if there are members eligible to vote on dissolution, the name of your nonprofit, (a) a declaration stating the date of the member meeting at which the resolution to dissolve was approved, that a quorum was present, and that the resolution got the requisite votes, or (b) a statement that the resolution was adopted by written consent of all members entitled to vote on dissolution if no members are entitled to vote on dissolution, a statement of that fact, the date of the board of directors meeting at which the resolution to dissolve was adopted, and a statement that the resolution received the vote of a majority of the directors in office.
a declaration that all of the nonprofit’s debts, obligations, and liabilities have been paid and discharged, or that enough provision has been made for their payment and discharge, a copy of the nonprofit’s plan of distribution, or a statement that no plan has been established
a statement that all of the nonprofit’s remaining property and assets have been transferred in accordance with the Kentucky Nonprofit Corporation Act; and a statement that no suits against the nonprofit are pending in any court, or that adequate provision has been made for the satisfaction of any judgment, order, or decree that may be entered against it in any pending suit.
The SOS website has a blank form for the articles of dissolution that may be downloaded. If you are submitting a plan of distribution, however, you should not utilize the form and instead write your own articles. You may wish to seek the services of a lawyer for this process. The SOS levies a $5 filing fee for the articles.
Note on Federal Taxation
You must submit IRS Form 990 or IRS Form 990-EZ for federal tax reasons. Schedule N (Liquidation, Termination, Dissolution, or Significant Disposition of Assets) must be completed, as well as copies of your articles of dissolution, resolution to dissolve, and plan of distribution. When filling out Form 990 or Form 990-EZ, tick the “Terminated” box in the header section on Page 1 of the return.]
Further Information
The SOS website has further information such as forms, postal addresses, phone numbers, and filing costs.
You should be aware that dissolving your organization will not prevent litigation for claims or liabilities accrued prior to dissolution. In most cases, these claims may be submitted up to two years following the dissolution.
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
what particular topics should be included in a distribution strategy providing enough prior notice of member and/or board meetings
the needed number of member and/or director votes to approve dissolution; precise methods to approve dissolution in writing without a meeting; what information must be included in letters to creditors; and how to react to legal claims 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.