Learn how to dissolve a nonprofit company in your state.
Under Vermont law, the following are the major actions to take when dissolving and winding up a 501(c)(3) nonprofit company.
Table of Contents
Dissolution Authorization
Closing begins with dissolution, and you will need a determination to dissolve to do so. The resolution should contain a dissolution plan outlining how the nonprofit’s residual assets will be allocated after all creditors have been paid. With the resolution and strategy in hand, Vermont law allows for voluntary dissolution in the following manner:
If your nonprofit does not have members, a vote of the directors is required; otherwise, action of the directors is required followed by a vote or other permission of the members.
The board must adopt the resolution to dissolve and plan of dissolution under the first approach. In general, dissolution must be agreed by a majority of the directors who are in office at the time.
The second option requires the board to first adopt the resolution and plan before submitting it to the members. Members then gather and vote to ratify the dissolution. A two-thirds majority of the members must vote in favor, although a greater majority vote may be necessary. Members may also authorize dissolution with written approval.
Make careful to accurately document the resolution to dissolve, the plan of dissolution, 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.
Dissolution Articles
You must submit articles of dissolution with the Secretary of State once your board (and, if relevant, voting members) have authorized the dissolution (SOS). The articles of dissolution must include the following:
the name of your nonprofit, the date dissolution was authorized if approval by members was not required, as well as a statement to that effect, as well as a statement that the plan of dissolution was approved by a sufficient vote of the board of directors if approval by members was required, (a) the designation and number of members of, and the number of votes entitled to be cast by, each class entitled to vote separately on dissolution; and (b) the total number of votes cast for dissolution.
The SOS website has a blank form for the articles of dissolution that may be downloaded.
“Rising Winds”
After your nonprofit has legally approved dissolution, it continues to exist merely for the purpose of completing certain last tasks known 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 have 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 conditions for asset distribution may also apply. If you have any concerns, you should speak with a lawyer.
Creditors and Other Claimants Should Be Warned
Giving notice to creditors and other claims is another aspect of winding up your dissolved charity. It is not required to provide notification. However, doing so will assist reduce your obligation and enable you to make final dispositions of residual assets more securely. After dissolution, you may send notification to known claims. You may also notify unknown claimants by posting a notice in a newspaper.
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 dissolution. 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, including as forms, postal addresses, and filing costs.
Be warned that dissolving your nonprofit will not end any ongoing legal proceedings initiated by or against your organization. Furthermore, for claims or responsibility accrued before to dissolution, fresh legal proceedings may be brought up to two years following 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 components should be included in a dissolution plan that provides sufficient prior notice of member and director meetings
Other than directors and members, approval of dissolution may be necessary; how to approve dissolution in writing without a meeting; what information must be included in communications to creditors and claimants; 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.
Dissolving and winding up your nonprofit company is simply one part of the closure process.