Learn how to dissolve a nonprofit company in your state.
Here’s a short rundown of the essential processes involved in dissolving and winding up a 501(c)(3) nonprofit company under Virginia law.
Nonprofit companies in Virginia are a form of Virginia nonstock company. In contrast to a traditional for-profit business, a nonstock corporation does not issue capital stock. Nonprofit company dissolution laws are part of Virginia’s broader general nonstock corporation legislation.
Table of Contents
Dissolution Authorization
Closing begins with a process known as disintegration. If your organization has members, a proposal to dissolve is required. If your nonprofit does not have members, you will need to disband it. In any situation, you’ll need a distribution plan that outlines how the nonprofit’s residual assets will be dispersed once all creditors have been paid. With the required documentation in hand, Virginia law allows for voluntary dissolution in the following manner:
If your organization has members, by action of the directors followed by a vote of the members; otherwise, by a vote of the directors.
In the first way, the board normally proposes dissolution to the members by filing a proposal to dissolve. The members then gather and vote on whether or not to adopt the idea. The method for approving a distribution plan is the same.
The second approach relies only on the board to authorize dissolution by passing a resolution to disband. A majority of the directors in office must adopt the resolution. The method for approving a distribution plan is the same.
Make careful to accurately document the proposal or resolution, the distribution plan, the votes of the directors, and, if required, the votes 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 State Corporation Commission once your board (and, if relevant, voting members) has authorized the dissolution (SCC). The articles of dissolution must include the following:
the name of your nonprofit, the date dissolution was authorized, one or more statements detailing what kind of member approval was obtained; and if approval by members was not required, a statement of that fact, the date of the board of directors meeting at which the dissolution was authorized, and a statement that dissolution was authorized by a vote of a majority of the directors in office.
The SCC website has a 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 distribution rules may apply; you must follow your distribution strategy. 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.
Articles of Dissolution
After you’ve completed the dissolution of your nonprofit, you must submit articles of termination with the SCC. (In rare circumstances, when relatively little is required to wind up, a nonprofit may file the articles of dissolution and articles of termination concurrently.) The following items must be included in the termination articles:
the name of your charitable organization
a declaration that all of the nonprofit’s assets have been dispersed; and a statement that the nonprofit’s dissolution has not been overturned.
The SCC website offers a single PDF file comprising paperwork for articles of dissolution and articles of termination, as well as extensive instructions.
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 or motion 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
On the SCC website, you may discover postal addresses, phone numbers, filing fees, and, of course, forms.
Be careful that dissolving your organization will not put an end to any litigation initiated by or against it prior to dissolution. Furthermore, for claims or responsibility accrued before to dissolution, fresh legal proceedings may be brought up to three 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 prior to beginning operations
dissolution of unusual nonprofits
what precise goods should be included in a distribution plan
providing sufficient prior notice of member and director meetings obtaining the necessary number of member votes to authorize dissolution
What information must be included in notifications to creditors and claimants, as well as how to react to legal claims upon 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.