Not all nonprofit corporations last forever. Among other possibilities, a nonprofit corporation may close because it is no longer able to get necessary funding, the directors or members have irreconcilable differences, or the organization simply decides that it has met its goals and no longer needs to exist. Whatever the underlying reason, if you choose to close down a Michigan 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 Michigan nonprofit organization will vary depending on several basic facts. Bearing that in mind, this article is limited in the following ways:
- it only covers Michigan 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 order, or for administrative reasons such as failing to file an annual report); and
- it only covers dissolution and winding up of nonprofits that have already started carrying on activities, have members entitled to vote on dissolution, already have debts or other liabilities, and/or have received and not returned payments for memberships (there are streamlined procedures to dissolve an nonprofit when none of the latter conditions apply).
Benefits of Formal Dissolution
Your nonprofit corporation is registered with the State of Michigan. Through the dissolution process, you will officially cancel that registration, and, by extension, officially end the corporation’s existence. For a nonprofit that is closing down, a properly-handled dissolution achieves at least two important goals. First, it 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.
The procedure for authorizing dissolution will vary depending on whether, in addition to a board of directors, your nonprofit corporation also has members or shareholders with the right to vote. You probably already know if your nonprofit has such members or shareholders. However, if you’re unsure, you should check your articles of incorporation, bylaws, or similar organizational documents.
Michigan’s Nonprofit Corporation Act (“NCA”) provides for voluntary dissolution through either:
- a vote of the members or shareholders entitled to vote on dissolution; or
- if there are no such members or shareholders, a vote of the directors.
If your nonprofit has voting members or shareholders, the board first must adopt a resolution to dissolve the corporation and a plan of distribution of the nonprofit’s assets. The proposed dissolution then must be submitted to the voting members or shareholders, and the members or shareholders must meet to vote on the proposal. You are required to give 10 days’ advance notice of the proposed member meeting to each member or shareholder entitled to vote. (In some instances, greater advance notice may be required.) At the meeting, a majority of all member votes or outstanding shares entitled to be cast must approve the dissolution.
If your nonprofit does not have voting members or shareholders, the board must vote to authorize the proposed dissolution. You must give 10 days’ advance notice of the vote to all current directors. Approval in this case requires a majority vote of all the directors currently in office. You may also be able to avoid a formal meeting of the board if all board members provided their written consent for dissolution.
If you dissolve based on a vote, make sure to properly record both the board’s resolution and plan, and the members’, shareholders’, and/or directors’ votes. You’ll need this information for filings with the state and the IRS.
Note: The NCA also allows for the possibility that your nonprofit corporation’s articles of incorporation contain a provision allowing one or more members or directors, or the holders of a specified number or proportion of shares, to require dissolution of your nonprofit at will or upon the occurrence of a specified event. If your articles of incorporation do contain such a provision, you can dissolve your nonprofit by having the requisite number of members or directors, or shareholders holding the requisite number of shares, sign a written consent (or otherwise take the necessary action as specified in the provision).
Attorney General’s Approval
After your members, shareholders, and/or board has approved the dissolution, you’ll need to file a certificate of dissolution with the Department of Licensing and Regulatory Affairs (“LARA”). However, before you can file the certificate, you must first obtain approval for your dissolution from the Attorney General (“AG”). To get the AG’s approval, you need to submit the following to the AG’s Charitable Trust Section:
- a completed and signed Dissolution Questionnaire
- a complete copy of the articles of incorporation (the articles must show evidence of being filed with the State of Michigan)
- a copy of the IRS determination letter showing your nonprofit is tax-exempt
- IRS returns and audited financial statements for the last 3 years, if prepared (if not prepared, you must provide financial reports in another format, such as treasurer’s reports)
- an inventory of any assets currently held (if your organization currently holds assets, the AG’s approval will not be given immediately; however, you may still submit the Dissolution Questionnaire so that the AG can begin its review; the AG later will send a letter asking for additional information including a final financial report and receipts for distributions of assets)
- receipts, or copies of cancelled checks, for the distributions of any assets to another charity; and
- a statement of the treasurer regarding the organization’s debts and obligations.
The Dissolution Questionnaire is available for download from the AG website. The downloadable form includes limited instructions.
Note that the AG will not give its approval until all of your nonprofit’s assets have been disbursed and all related receipts have been submitted. Consequently, it may take a while before you can submit your certificate of dissolution to LARA to complete the dissolution process.
Certain Matters are Unchanged by Dissolution
Among other things, dissolution alone does not:
- subject your directors to standards of conduct different from those that applied before dissolution
- transfer title to your corporation’s assets
- change quorum or voting requirements for the board, shareholders, or members and does not alter provisions regarding election, appointment, resignation, or removal of, or filling vacancies among, directors or officers, or provisions regarding amendment or repeal of bylaws or adoption of new bylaws
- does not prevent transfer of shares if otherwise authorized
- prevent your nonprofit from suing and being sued in its own name; or
- stop a legal action brought against your nonprofit before its dissolution.
Following approval of 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 to designate one or more officers and/or directors to handle these matters.
Under the NCA, the main winding up tasks are:
- collecting the nonprofit’s assets
- selling or otherwise transferring, with or without security, the nonprofit’s assets which are not to be distributed in kind; and
- paying the nonprofit’s debts and other liabilities.
Regarding the last two listed items, your nonprofit’s first obligation is to pay and discharge all of its liabilities and obligations. Only then may your organization distribute any remaining assets.
Also, when it comes to asset distribution, be aware that a dissolving 501(c)(3) organization must distribute its assets for tax-exempt purposes. In practice, this generally means distributing assets to another 501(c)(3) organization. Your plan of distribution may require distribution to specific persons, societies, organizations, corporations, or other entities. There also may be cases where specific assets were conditionally on loan to your nonprofit, and will need to be returned according to the loan conditions. If you have any questions about whether the general requirement to distribute assets another 501(c)(3) organization applies to your nonprofit, you should check with a lawyer.
Notice to Creditors and Other Claimants
After you have dissolved your nonprofit, you may give notice of the dissolution to all of the nonprofit’s creditors. Giving notice involves both publication in a newspaper and mailings directly to known creditors.
For newspaper publication, the notice must state that all persons who are creditors of your nonprofit must file their claims in writing with your organization at a place and on or before a date named in the notice. The date in the notice cannot be not less than 6 months after the date of the first publication. The notice must appear once a week for three consecutive weeks. On or before the date of first publication in a newspaper, your nonprofit must also mail a copy of the notice to each known creditor of the corporation. Generally speaking, claims not made by the deadline in your notice will be barred.
There are additional rules, not covered here, regarding both the preparation of notices and the handling of claims by creditors. As some of these rules can be difficult to understand, you may want to consider getting assistance from an attorney.
Certificate of Dissolution
After your members, shareholders, and/or board has approved the dissolution, and you have received approval from the AG (which means you have paid off debts and properly distributed any remaining assets), you must file a certificate of dissolution with LARA. For dissolutions based on member, shareholder, or board vote, you should use LARA Form BCS/CD-531. For dissolutions based on a specific provision in your articles of incorporation, for example based on the occurrence of a specific event, you should use LARA Form BCS/CD-532. Blank versions of each of these forms are available for download from the LARA website. There is a $10 fee to file the certificate of dissolution.
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.
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.