Learn how to dissolve a nonprofit company in your state.
Do you need to dissolve your 501(c)(3) nonprofit company in Illinois? Here’s a short rundown of the basic processes involved in dissolving and winding up your nonprofit company under Illinois law.
Table of Contents
Dissolution Authorization
Closing begins with dissolution, and you will need a determination to dissolve to do so. With the resolution in hand, Illinois law allows for voluntary dissolution in the following ways:
by unanimous written approval of the members eligible to vote on dissolution; or if your organization does not have members entitled to vote on dissolution—and has no outstanding debts—by a vote or other consent of the directors.
If all members grant written approval, the first way allows the members to authorize the dissolution on their own. The board does not need to take any action in this matter.
The board must first approve the resolution and then propose it to the members using the second approach. Members then gather and vote to ratify the dissolution. Members may also grant written permission for the dissolution following the board’s application. (Unlike the first option, members’ written assent may not need to be unanimous in this case).
The third way, which applies when there are no members eligible to vote on dissolution, relies only on the board to sanction the dissolution. To employ this strategy, your organization must not have any outstanding obligations. The majority vote of the directors is the default norm for approval. Alternatively, if all directors provide written permission, the board might authorize dissolution.
Make careful to correctly document the motion to dissolve, the votes or written consents of the directors, and the votes or written consents of the members. This information will be required for filings with the state and the IRS.
Distribution Strategy
Aside from the decision to dissolve, you must also establish a distribution plan. After all creditors have been paid, the plan will specify how the nonprofit’s remaining assets will be dispersed. You may implement the distribution strategy in one of three ways:
by action of the directors, followed by a vote or other consent of the members; or, if there are no voting members, by a vote or other consent of the directors.
You must correctly document your plan of distribution, including votes or consents for its approval, and keep the plan on file with the state and the IRS.
Dissolution Articles
After your board of directors and, if appropriate, voting members have accepted the dissolution, you must file articles of dissolution with the Secretary of State (SOS). The articles of dissolution must include the following:
If dissolution was approved by the directors alone, either (a) a statement that the dissolution received the affirmative vote of a majority of the directors in office, at a meeting of the board of directors, and the date of the meeting, or (b) a statement that the dissolution received the affirmative vote of a majority of the directors in office, at a meeting of the board of directors, and the date of the meeting.
The SOS website has a blank form for the articles of dissolution (Form NFP 112.20) that may be downloaded. A $5 filing fee is required.
Winding Down
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 obligations, such as those in your articles of incorporation, bylaws, or plan of 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.
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.
Be careful that dissolution will not put an end to any litigation initiated by or against your organization prior to dissolution. 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 topics should be included in a distribution strategy providing enough prior notice of member or board meetings
the needed number of votes from directors or members to authorize dissolution
How to expressly agree dissolution in writing without a meeting; what information must be included in notifications to creditors; and how to react to legal claims after dissolution.
Furthermore, your articles of incorporation or bylaws may incorporate restrictions that apply instead of or in addition to state law (for example, as regards the number of member votes needed to approve dissolution). You are highly advised to speak with a lawyer for further information on these and other issues.
