Not all nonprofit corporations last forever. Among other possibilities, a nonprofit corporation may close because it’s no longer able to get necessary funding, the directors or members have irreconcilable differences, or the organization simply decides that it’s met its goals and no longer needs to exist. Whatever the underlying reason, if you choose to close down a Maryland nonprofit corporation, you’ll need to go through a process called dissolution. Dissolution requires a vote or other formal authorization, the filing of key documents with government agencies, and a group of other tasks collectively known as winding up the corporation.
The specific steps for closing a Maryland nonprofit organization will vary depending on several basic facts. Bearing that in mind, this article is limited in the following ways:
- it only covers Maryland nonprofit corporations (not all nonprofits are incorporated)
- it only covers nonprofits that have applied to the IRS and been approved specifically as 501(c)(3) tax-exempt organizations (not all nonprofits are exempt from paying taxes, and not all tax-exempt nonprofits are 501(c)(3) organizations)
- it only covers voluntary dissolution based on a decision by the nonprofit’s directors and, where applicable, the nonprofit’s members (a nonprofit may be involuntarily dissolved through a court decree, or its charter may be “forfeited” for administrative reasons such as failing to file an annual report); and
- it only covers dissolution and winding up of nonprofits that have already had an organization meeting of the board of directors (there are separate procedures for dissolving nonprofits that haven’t yet had this meeting).
Benefits of Formal Dissolution
Your Maryland nonprofit corporation is registered with the State of Maryland. Through the dissolution process, you will officially cancel that registration, and, by extension, officially end the corporation’s existence. More specifically, for a nonprofit that’s closing down, a properly-handled dissolution achieves at least two important goals. First, it ultimately will put your organization beyond the reach of creditors and other claimants. Second, it will allow you to fulfill your legal obligations regarding the proper distribution of any remaining corporation assets.
Maryland Nonprofit Corporation Law
Maryland does not have a comprehensive statute that applies specifically to nonprofits, nor does Maryland law generally use the term “nonprofit corporation.” Instead, Maryland has a limited set of laws for “nonstock corporations.” A nonstock corporation is a corporation that does not issue any stock, nor, by extension, have any shareholders. Generally speaking, a Maryland nonprofit corporation will be a nonstock corporation whose articles of incorporation include statements that the corporation “is organized exclusively for charitable, religious, educational, and scientific purposes,” and that no part of the corporation’s net earnings will benefit or be distributed to its members, trustees, officers, or other private persons except to pay reasonable compensation for services and make payments and distributions to further the corporation’s charitable, religious, educational, or scientific purposes.
The limited laws specifically for nonstock corporations have relatively little to say about dissolution of these entities. For the most part, the nonstock corporation laws rely on Maryland’s General Corporation Law (“GCL”) for rules governing dissolution and winding up. Because the rules contained in the GCL are intended first and foremost for for-profit corporations, it is not always obvious how the rules should apply to nonprofit organizations. Therefore, you are strongly urged to consult with a knowledgeable lawyer for assistance in dissolving your Maryland nonprofit corporation.
According the GCL, dissolution is authorized by a resolution approved by a majority of the nonprofit’s entire board of directors. You should make sure to properly record both the board’s resolution and the directors’ votes. You’ll need this information for filings with the state and the IRS.
Notice to Creditors
After a majority of your board has approved the dissolution, you must file articles of dissolution with the Maryland State Department of Assessments and Taxation (“SDAT”). However, if your nonprofit has known creditors, you must mail notice of the approved dissolution to them at least 20 days before filing your articles of dissolution. Notices should be sent to the creditors’ addresses as shown in your organization’s records.
Articles of Dissolution
The articles of dissolution must contain multiple pieces of information about your dissolved corporation, including:
- the name of your corporation
- the address of your corporation’s principal office
- the name and address of a resident agent of the corporation who will serve for one year after dissolution and until the affairs of the corporation are wound up
- the name and address of each director of the corporation
- the name, title, and address of each officer of the corporation
- a statement that dissolution of the corporation was approved in the manner and by the vote required by law and by the charter of the corporation, and a statement of the manner of approval (which generally will be a majority vote of the board of directors)
- a statement that notice of the approved dissolution was mailed to all known creditors of the corporation and the date of the mailing, or a statement that the corporation has no known creditors; and
- a statement that the corporation is dissolved.
The articles must be signed by an authorized individual. (This generally means a president, vice president, chairman, chief executive officer, chief operating officer, or chief financial officer, unless your bylaws or a resolution of the board of directors allows for another individual to sign.) The signature also must be witnessed and attested to by an authorized individual. (This generally means the corporation’s secretary, treasurer, chief financial officer, assistant treasurer, or assistant secretary, unless your bylaws or a resolution of the board of directors allows for another individual to witness and attest.)
There is a $100 fee to file the articles of dissolution. Regular processing time is 7-8 weeks. You can request expedited processing (within 7 business days) for an additional fee. Hand-delivered documents also receive expedited processing but also require an additional fee. Apart from mail and hand-delivery, you may submit by fax, but you will be charged the expedited processing fee.
An articles of dissolution form including instructions is available for download from the SDAT website. The form may be used for most kinds of Maryland corporations, including nonstock corporations.
Be aware that your organization’s name will become available for use by others after dissolution.
After your board approves dissolution, your nonprofit continues to exist only for the purpose of taking care of certain final matters that, collectively, are known as “winding up” the company. It may be appropriate for the board to designate one or more officers and/or directors to handle the winding up.
Key winding up tasks, some mentioned in the GCL and some in the nonstock corporations statute, include:
- carrying out the contracts of the nonprofit
- selling all or any part of the nonprofit’s assets at public or private sale
- suing or be sued in the name of the nonprofit
- collecting and distributing nonprofit assets
- paying and discharging, or making adequate provision to pay and discharge, every liability and obligation of the nonprofit; and
- properly distributing any remaining nonprofit assets.
Regarding the last two listed items, your organization’s first obligation is to discharge debts and obligations. Only then may you distribute any remaining assets to organizations or people other than creditors and claimants.
A dissolving 501(c)(3) organization must distribute its remaining assets for tax-exempt purposes. In practice, this generally means distributing the assets to another 501(c)(3) organization. The nonstock corporations statute allows for the possibility that some remaining assets may need to be distributed to specific other organizations. These more specific requirements generally would be contained in your nonprofit’s articles of incorporation, bylaws, or a plan of distribution approved by your board of directors. If you have any questions about the asset distribution requirements for your nonprofit, you should consult with a lawyer.
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) and copies of your articles of dissolution, resolution to dissolve, and, if applicable, any written dissolution plans. When completing either 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, more specific 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, and filing fees, on the SDAT website.
Final Note: 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.