Not all nonprofit corporations last forever. Among other possibilities, a nonprofit may close because it’s no longer able to get necessary funding, the directors or members have irreconcilable differences, or the organization decides that it’s met its goals and no longer needs to exist. Whatever the underlying reason, if you choose to close down a New Mexico 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.
This article only covers the most basic kind of voluntary dissolution of a typical New Mexico 501(c)(3) nonprofit corporation that’s already doing business. There may be different rules or procedures for other types of nonprofits or other situations such as an involuntary dissolution.
Benefits of Formal Dissolution
Your nonprofit corporation is registered with the State of New Mexico. 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 puts your organization beyond the reach of creditors and other claimants. Second, it allows 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 or not your nonprofit corporation has members. (If you’re unsure about this, you should check your articles of incorporation, bylaws, or similar organizational documents.)
New Mexico’s Nonprofit Corporation Act (“NCA”) provides for voluntary dissolution through either:
- action by the directors followed by a vote of the members; or
- if there are no members, a vote of the directors.
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, which must be approved by a majority of the directors. If you have any remaining assets, you also likely will need to adopt a plan of distribution. This, too, commonly requires a majority of the directors’ votes for approval. However, your articles of incorporation or bylaws may require a greater majority vote for approval of the dissolution or a plan of distribution.
If your nonprofit has voting members, the board first must adopt a resolution to dissolve and submit it to the members. The members then must meet and vote on the resolution. Each member entitled to vote on dissolution must be given at least 10 days’ advance notice. A two-thirds majority of the members’ votes is required to approve the dissolution. Notice to members of the meeting to vote on a plan of distribution must include a copy or summary of the plan. Approval of a plan of distribution requires two-thirds of the members’ votes. The resolution to dissolve can also be approved by members without a formal meeting if all members provide their written consent for the dissolution.
In addition to the resolution to dissolve, if you have assets to distribute upon dissolution, your board likely will also need to adopt a resolution recommending a plan of distribution. The plan of distribution lays out in detail how the nonprofit’s assets will be distributed upon dissolution. It must conform to the general NCA rules, discussed below, for nonprofit asset distribution. Following board adoption of the plan, the members must approve it by a two-thirds majority vote.
You should always check your articles of incorporation and bylaws before any member or board vote on dissolution—if they contain rules requiring a greater majority vote on dissolution or a plan of distribution than is required by the NCA, you must follow those rules.
Make sure to properly record the board’s resolution, any plan of distribution, the directors’ votes, and, where necessary, the members’ votes. You’ll need this information for filings with the state and the IRS.
Be aware that dissolution alone does not stop any legal action brought by or against your nonprofit prior to dissolution. Dissolution alone also does not block a claim against, or liability incurred by, your nonprofit prior to dissolution, so long as a claimant starts an action against your nonprofit within two years of dissolution.
Notice to Creditors
After your nonprofit has authorized dissolution, the NCA requires you to “immediately” mail notice of the proposed dissolution to each known creditor of your nonprofit.
Application for Tax Clearance
To complete the dissolution of your nonprofit, you’ll ultimately need to file articles of dissolution. However, you first must receive tax clearance from the Tax Compliance Division of the Secretary of State ("SOS"). This requires completing and filing a tax clearance application form with the Tax Compliance Division. You must be up to date with annual reports and fees before filing the form. The form, which requires only a few pieces of information, is available as part of a small package of nonprofit dissolution documents available from the SOS website.
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. It may be appropriate to designate one or more officers or directors to handle these matters.
Generally speaking, you can only distribute money and property after you have paid off all of your nonprofit’s debts. For distributions, the NCA has specific rules you will 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 distribution rules, contained in your articles of incorporation, bylaws, or a plan of distribution, may also apply. Current and former members, directors, and officers generally are prohibited from receiving any distributions. If you have any questions about proper asset distribution, you should consult with a lawyer.
Articles of Dissolution
After your nonprofit has approved dissolution, sent notice to creditors, received tax clearance, paid off all debts, and distributed any remaining assets, you must file articles of dissolution with the SOS.
The articles of dissolution must contain:
- the name of the corporation
- if your nonprofit has members who can vote on dissolution, either (a) a statement setting forth the date of the members' meeting when the resolution to dissolve was adopted, that a quorum was present, and that the resolution was adopted by at a least two-thirds vote, or (b) a statement that the resolution was adopted by a written consent signed by all members entitled to vote on dissolution
- if your nonprofit does not have members or members entitled to vote on dissolution, a statement of this fact, the date of the directors' meeting at which the resolution to dissolve was adopted, and a statement that the resolution received a majority vote of the directors
- a statement that all debts, obligations, and liabilities of the corporation have been paid and discharged or that adequate provision has been made therefor
- a copy of the plan of distribution, if any, as adopted by the corporation or a statement that no plan was adopted
- a statement that all the remaining property and assets of the corporation have been transferred, conveyed, or distributed in accordance with the provisions of the NCA; 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 that may be entered against the nonprofit in any pending suit.
Currently, you can download an articles of dissolution form (Form DNPDV) from the SOS website, and also download a package containing the application for tax clearance and instructions on filing both the application and articles of dissolution (Form DNP-DVI) from the SOS website. You must submit the original and one copy of the articles of dissolution to the SOS, and you must attach your approved tax clearance to your filing. There is a $10 fee to file the articles 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), 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.