Need to close down your Kentucky nonprofit corporation? Here’s a quick overview of the main steps to dissolve and wind up a 501(c)(3) nonprofit corporation under Kentucky law.
Closing starts with dissolution, and to dissolve your nonprofit, you will need a resolution to dissolve. In addition, you’ll likely also need a plan of distribution that indicates how the nonprofit’s remaining assets will be distributed after all creditors have been paid. With a resolution and plan in hand, Kentucky law provides for voluntary dissolution as follows:
- if your nonprofit has members, by action of the directors followed by a vote or other consent of the members; or
- if your nonprofit doesn’t have members, by a vote of the directors.
Under the first method, the board first must adopt the resolution to dissolve and then submit it to the members. The members then generally meet and vote to approve the resolution. Alternatively, members can provide unanimous written approval for the resolution. The procedure for approving a plan of distribution is essentially the same.
Under the second method, it is up to the board alone to approve the resolution to dissolve. Generally, the resolution must be approved by a majority of the directors in office at the time of approval. The procedure for approving a plan of distribution is the same.
Make sure to properly record the resolution to dissolve, the plan of distribution, the directors’ votes, and, where necessary, the members’ votes or written consents. You’ll need this information for filings with the state and the IRS.
Notice to Creditors
After adopting the resolution to dissolve, you must "immediately" mail notice of the proposed dissolution to each of your nonprofit’s known creditors.
After your nonprofit has formally authorized dissolution, it continues to exist only for the purpose of taking care of certain final matters that, collectively, are known as winding up the company. Winding up is largely about paying off any debts and then distributing any remaining assets, but there may also be other tasks involved.
Generally speaking, you can only distribute money and property after you’ve paid off all of your nonprofit’s debts. Then, for asset distributions, there are specific rules you need to follow. For example, your nonprofit must return any items that were loaned to it on the condition that they would be returned upon dissolution. In addition, after paying off debts and returning loaned assets, a dissolving 501(c)(3) organization must distribute its remaining assets for tax-exempt purposes. In practice, this usually means distributing assets to one or more other 501(c)(3) organizations. Other requirements for distributions, including items that may be contained in your articles of incorporation, bylaws, or plan of distribution, may also apply. If you have any questions, you should consult with a lawyer.
Articles of Dissolution
After you have paid and discharged all debts and properly transferred any remaining property—in other words, after you’ve finished winding up your nonprofit—you must file articles of dissolution with the Secretary of State (SOS). The articles of dissolution must contain:
- the name of your nonprofit
- if there are members entitled to vote on dissolution, (a) a statement giving the date of the member meeting at which the resolution to dissolve was adopted, that a quorum was present at the meeting, and that the resolution received the necessary votes, or (b) a statement that the resolution was adopted by the written consent of all members entitled to vote on dissolution
- if there are no members entitled to vote on dissolution, a statement of that fact, the date of the meeting of the board of directors 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 statement that all of the nonprofit’s debts, obligations, and liabilities have been paid and discharged or that adequate provision has been made for their payment and discharge
- a copy of the plan of distribution as adopted by the nonprofit, or a statement that no plan was adopted
- 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 there are no suits pending against the nonprofit in any court, or that adequate provision has been made for the satisfaction of any judgment, order, or decree which may be entered against it in any pending suit.
A blank form for the articles of dissolution is available for download from the SOS website. However, if you are filing a plan of distribution, you should not use the form, but instead draft your own articles. You may want to get assistance from a lawyer for this task. The SOS charges a $5 fee to file the articles.
Federal Tax Note
For federal tax purposes, you’ll need to file IRS Form 990 or IRS Form 990-EZ. You must include a completed Schedule N (Liquidation, Termination, Dissolution, or Significant Disposition of Assets), as well as copies of your articles of dissolution, resolution to dissolve, and plan of distribution. When completing Form 990 or Form 990-EZ, you’ll need to check the “Terminated” box in the header area on Page 1 of the return. For additional guidance, check out Every Nonprofit’s Tax Guide, by Stephen Fishman (Nolo), go to the IRS website, or consult with a tax professional.
You can find additional information, such as forms, mailing addresses, phone numbers, and filing fees, on the SOS website.
Be aware that dissolving your nonprofit will not stop lawsuits for claims or liability incurred prior to dissolution. Generally, these claims may be brought up to two years after dissolution.
This article covers only the most basic steps of voluntary dissolution after your nonprofit has started doing business. There are many additional, more specific rules, covering things like:
- involuntary dissolution
- dissolution of non-typical nonprofits
- what specific items should be contained in a plan of distribution
- giving proper advance notice of member and/or director meetings
- the required number of member and/or director votes to approve dissolution
- specific steps to approve dissolution in writing without a meeting
- what needs to be included in notices to creditors; and
- how to respond to legal claims after dissolution.
In addition, your articles of incorporation or bylaws may contain rules that apply instead of, or along with, state law. You are strongly encouraged to consult with a lawyer to obtain additional information on these and other points.
Dissolving and winding up your nonprofit corporation is only one piece of the process of closing your organization. For further, general guidance on many of the other steps involved, check Nolo’s 20-point checklist for closing a business and the Nolo article on what you need to know about closing a business.