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 has met its goals and no longer needs to exist. Whatever the underlying reason, if you choose to close down a Nebraska 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 nonprofit organization will vary depending on several basic facts. Bearing that in mind, this article is limited in the following ways:
- it only covers 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 nonprofits designated as “public benefit corporations” under Nebraska law (any Nebraska nonprofit that is a 501(c)(3) organization is by definition a Nebraska “public benefit corporation”); and
- it only covers voluntary dissolution based on a decision by the nonprofit’s directors and, where applicable, the nonprofit’s members (an nonprofit may be involuntarily dissolved through a court decree, or for administrative reasons such as failing to file a biennial report or pay required fees).
Benefits of Formal Dissolution
Your nonprofit corporation is registered with the State of Nebraska. Through the dissolution process, you will officially cancel that registration and officially end the corporation’s existence. 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.
The procedure for authorizing dissolution will vary depending on whether, in addition to a board of directors, your nonprofit corporation also has members. (If you’re unsure of whether your nonprofit has members, you should check your articles of incorporation, bylaws, or similar organizational documents.)
Nebraska’s Nonprofit Corporation Act (“NCA”) provides for voluntary dissolution through either:
- a vote of the directors; or
- if there are members, a vote of the directors and a vote of the members.
If your nonprofit does not have members, it is up to the board to approve dissolution. You should look to your articles of incorporation and bylaws for specific rules and requirements regarding the board approval process. (Generally, you will need a resolution to dissolve, and dissolution must be approved by a majority of the directors in office at the time of approval.) You must give at least two days’ advance notice of the meeting on dissolution to all directors. In approving dissolution, the directors must also adopt a plan of dissolution that indicates to whom the nonprofit’s assets will be distributed after all creditors have been paid. Your board can also take action to dissolve without a formal meeting if all board members sign a written consent authorizing the dissolution.
If your nonprofit has voting members, the board first must approve a resolution to dissolve the corporation and then submit it to the members. If the board wants the dissolution to be approved by the members at a membership meeting, members must be given at least 10 days’ advance notice; the notice must include a copy or summary of the plan of dissolution. A two-thirds majority of the members, or a majority of the membership voting power, whichever is less, is required to approve the dissolution. The board may also obtain approval from the members through written consent or written ballot, in which case the material soliciting the consent or ballot must contain a copy or summary of the plan of dissolution. Approval by written consent requires 80% of the members’ voting power.
The NCA also allows for the possibility that your articles of incorporation or bylaws require that dissolution be approved by people other than the board or members. If your articles or bylaws do contain such a provision, you will also need to obtain approval, in writing, from those other people.
Make sure to properly record the board’s resolution and plan of dissolution, the directors’ votes, and, where necessary, the members’ votes. You’ll need this information for filings with the state and the IRS.
Certain Matters are Unchanged by Dissolution
Among other things, dissolution alone does not:
- transfer title of the nonprofit’s property
- subject the nonprofit’s directors or officers to standards of conduct different from those that applied before dissolution
- change quorum or voting requirements for the nonprofit’s board or members, change provisions for selection, resignation, or removal of the nonprofit’s directors or officers or both, or change provisions for amending the nonprofit’s bylaws
- prevent commencement of a proceeding by or against the nonprofit in its corporate name
- abate or suspend a proceeding pending by or against the nonprofit on the effective date of dissolution; or
- terminate the authority of the nonprofit’s registered agent.
Initial Notice to Attorney General
You must send written notice of your intention to dissolve to the Attorney General (“AG”) at or before the time you submit articles of dissolution to the Secretary of State (“SOS”). Your notice to the AG must include a copy or summary of your plan of dissolution. In response to the notice, the AG should provide written consent to your nonprofit that it can proceed with dissolution. You are prohibited from transferring any of your nonprofit’s assets until 20 days after you have given notice to the AG, or before the AG provides its written consent, whichever is earlier.
Articles of Dissolution
After your board (and, where applicable, voting members) have approved the dissolution, you’ll need to file articles of dissolution with the SOS. (Strictly speaking, the NCA does not require you to file this document, instead stating that a nonprofit “may” dissolve by filing the articles. However, if you don’t file articles of dissolution, you won’t properly complete the voluntary dissolution of your nonprofit organization.)
The articles of dissolution must contain:
- the name of your nonprofit
- the date dissolution was authorized
- a statement that dissolution was approved by a sufficient vote of the board
- if approval of members was not required, a statement to that effect
- if approval by members was required, (a) the designation, number of memberships outstanding, number of votes entitled to be cast by each class entitled to vote separately on dissolution, and number of votes of each class indisputably voting on dissolution; and (b) either the total number of votes cast for and against dissolution by each class entitled to vote separately on dissolution or the total number of undisputed votes cast for dissolution by each class and a statement that the number cast for dissolution by each class was sufficient for approval by that class
- if approval of dissolution by some person or persons other than the members or the board is required, a statement that the approval was obtained; and
- a statement that the nonprofit gave the required notice to the AG regarding the intention to dissolve and plan of dissolution.
The SOS does not provide a form or template for the articles of dissolution, so you will have to draft your own. There is a base fee of $5 to file the articles, plus an additional fee of $5 per page. Also, online filing is available through the state’s eDelivery system.
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. 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:
- protecting the nonprofit’s assets and minimizing its liabilities
- discharging the nonprofit’s liabilities and obligations
- disposing of nonprofit properties that will not be distributed in kind
- returning, transferring, or conveying assets held by the nonprofit upon the condition that they be returned in the event of dissolution
- transferring the nonprofit’s assets as provided in the articles of incorporation or bylaws
- if no provision has been made in your nonprofit’s articles of incorporation or bylaws for distribution of assets on dissolution, transferring the nonprofit’s assets to one or more purposes described in section 501(c)(3) of the Internal Revenue Code; and
- doing every other act necessary to wind up and liquidate the nonprofit’s assets and affairs.
Generally speaking, distributions of assets are made only after you have paid off all of your nonprofit’s liabilities and obligations. If your nonprofit had certain items that were conditionally on loan to it, those items must be returned to whoever loaned the them, according to the terms of the loan. Finally, a dissolving 501(c)(3) organization must distribute its remaining assets for tax-exempt purposes. In practice, this generally means distributing those assets to one or more other 501(c)(3) organizations. If you have any questions about how to distribute assets upon dissolution, you should check with a lawyer.
Notice to Creditors and Other Claimants
One other part of winding up your dissolved nonprofit involves giving notice of its dissolution to creditors and other claimants. Giving notice is optional. However, doing so will help limit your nonprofit’s liability and allow it to more safely distribute its assets to other nonprofit organizations.
Under the NCA, one way to give notice is by sending a written document directly to known claimants after dissolution. Proper written notice must:
- describe information that must be included in a claim
- provide a mailing address where a claim may be sent
- state the deadline, which may not be fewer than 120 days from the effective date of the written notice, by which your dissolved nonprofit must receive the claim; and
- state that the claim will be barred if not received by the deadline.
You also may give notice to unknown (potential) claimants by publishing in a newspaper. As with sending direct notice to known claimants, there are specific rules for giving notice through publication. Generally speaking, claimants have five years after the date of newspaper publication to bring a claim.
Some of the rules for giving notice and responding to claims can be hard to understand. Therefore, if you choose to give claimants notice, you should strongly consider getting assistance from a business attorney.
Final Notice to the Attorney General
When “all or substantially all” of your nonprofit’s assets have been transferred following approval of dissolution, your board of directors must deliver to the Attorney General a list showing who, other than creditors, received those assets and what assets each person or entity received.
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 dissolution. 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, 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, phone numbers, and filing fees, on the SOS 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.