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 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 New York 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 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
- it only covers voluntary dissolution based on a decision by the nonprofit’s directors and, where applicable, members (a nonprofit may be involuntarily dissolved through a court order, or for administrative reasons such as failing to file annual financial reports)
- it does not cover court-supervised liquidations following voluntary dissolutions; and
- it does not cover various details related to specific subcategories of nonprofits.
Regarding the last point: New York law distinguishes four main types of nonprofit corporation, which it calls Type A, Type B, Type C, and Type D. The type of your nonprofit depends on the purpose for which it was formed. This article focuses on rules that apply to Type-B nonprofits, which are nonprofits formed for charitable, educational, religious, scientific, literary, or cultural purposes, or for the prevention of cruelty to children or animals.
Because of the complexity of New York law for nonprofit corporations (which is not limited to the fact that the state distinguishes multiple “types” of nonprofits), you should strongly consider finding a knowledgeable attorney to assist you with the dissolution of your organization.
Benefits of Formal Dissolution
Your nonprofit corporation is registered with the State of New York. Through the dissolution process, you will 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 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 has members and assets to distribute. Other factors—such as special provisions in your nonprofit’s certificate of incorporation—may also play a role.
Generally speaking, New York’s Not-for-Profit Corporation Law (“N-PCL”) provides for voluntary dissolution through either:
- a vote of the directors and a vote of the members; or
- if there are no members, a vote of the directors.
If your nonprofit has voting members, your board must adopt a plan of dissolution and submit it to the members for a vote. The plan must include a statement regarding whether or not your nonprofit has assets and liabilities at the time of dissolution. (A special exception exists for cases where less than $25,000 in assets have been set aside specifically to pay expenses related to “winding up” the nonprofit.) If there are assets, your plan must provide additional information, such as the value of the assets, and whether any asset is required to be used for a particular purpose and how those assets will be distributed. For nonprofits with assets, the plan must be approved by a two-thirds members' vote. If your nonprofit does not have assets, the plan generally must be approved by the number of members specified in your certificate of incorporation or bylaws. You must give proper notice to directors and members of any meeting to vote on dissolution.
If your nonprofit does not have members, the board approves the plan of dissolution and distribution of assets. The plan must include information about the nonprofit's assets and liabilities at the time of dissolution. In general, the plan must be approved by a majority of directors, or by the number of directors required under your certificate of incorporation or bylaws. If at the time of the vote you do not have enough directors in office to constitute a quorum, the plan must be approved unanimously by the directors.
Make sure to properly record the plan of dissolution and distribution of assets, the directors’ votes, and, where necessary, the members’ votes. You’ll need this information for filings with the state agencies, the IRS, and, potentially, a state court.
Court Approval/Attorney General Notice
If your nonprofit has assets, then, after the directors (and members) have authorized dissolution, you must also obtain approval from a justice of the supreme court in the judicial district in which your nonprofit’s office is located. You must submit a special type of application, known as a verified petition, to the appropriate court, along with the plan of dissolution and distribution of assets, and certified copies of the consents of directors (and members). You must also send notice of the filing to the attorney general along with copies of the petition, plan, and consents.
State supreme court approval is not required if your nonprofit does not have assets to distribute or any outstanding debts at the time of dissolution, or has less than $25,000 in assets that have been set aside specifically to pay expenses related to winding up the nonprofit. However, your nonprofit still must file a certified copy of its plan of dissolution with the attorney general. The N-PCL states that the plan must be filed within 10 days of your nonprofit authorizing the plan. The attorney general’s office, however, states that you should file with them only after you “carried out such plan, satisfied any of its remaining debts, and prepared a final financial report indicating a zero balance.”
You should consider getting assistance from an attorney for filings with the supreme court and the attorney general.
Certain Matters are Unchanged by Dissolution
Among other things, dissolution alone does not:
- transfer title to the nonprofit’s property from the corporation to the directors
- change quorum or voting requirements for the nonprofit’s board or members
- change provisions regarding election, appointment, resignation, or removal of directors or officers
- change provisions for amending, repealing, or adopting bylaws
- prevent the nonprofit from suing or being sued, or participating in legal proceedings; or
- generally affect any legal remedy available to or against the nonprofit, its directors, officers, or members, for any right or claim existing prior to dissolution (a key exception relates to creditors and other claimants who receive notice of the dissolution).
After your nonprofit has formally authorized dissolution, and, if necessary, received court approval for the dissolution, it continues to exist only for the purpose of taking care of certain final matters that are known as “winding up” the company. Under the N-PCL, key winding up tasks include fulfilling or discharging contracts, collecting and selling assets, discharging or paying liabilities, and doing any other appropriate acts to liquidate the organization. It may be appropriate to designate one or more officers or directors to handle these matters.
Under the N-PCL, you generally must pay your liabilities and distribute assets within 270 days from the date your plan was filed with the attorney general, or approved by a justice of the supreme court. However, if there’s a good reason why you can’t complete the process within 270 days, the attorney general may grant you an extension of time up to one year.
Also, generally speaking, you can only distribute money and property after you have paid off all of your nonprofit’s debts. And, when it comes to distributions, 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. Along these lines, the N-PCL requires that assets received and held by your nonprofit for certain specified purposes be distributed to one more other nonprofits engaged in substantially similar activities. Assets to be distributed to creditors who are unknown or can’t be found must ultimately be paid to the state comptroller. Other distribution rules, contained in your certificate of incorporation, bylaws, or other documents, may also apply. If you have any questions, you should consult with a lawyer.
If your nonprofit has no assets or liabilities, winding up should be a much simpler operation—and, according to the attorney general, you shouldn’t need to file anything with their office until it’s completed.
State Tax Clearance
You ultimately must file a certificate of dissolution to complete the dissolution of your nonprofit. However, before you can file the certificate, you need to get the consent of New York’s Department of Taxation and Finance ("DTF"). You can request the consent by calling or writing to the New York State Tax Department’s Corporation Tax Dissolution Unit.
Certificate of Dissolution
After your plan of dissolution and distribution of assets has been fully authorized and carried out, you must complete a certificate of dissolution, have it approved by the attorney general, and then file it with the New York Department of State ("DOS"). The certificate must contain:
- the name of your nonprofit
- the date its certificate of incorporation was filed
- the name and address of each officer and director
- your nonprofit’s “type” (A, B, C, or D) at the time of dissolution
- a statement as to whether or not the nonprofit held assets at the time of authorization of its plan of dissolution which were legally required to be used for a particular purpose on the date dissolution was authorized
- a statement that your nonprofit elects to dissolve
- a statement of the manner in which dissolution was authorized (for example, by a majority vote of the directors)
- either a statement that the plan of dissolution and distribution of assets was approved by a justice of the state supreme court (in which case a copy of the court’s order must be attached to the certificate), or a statement that a copy of the plan of dissolution and distribution of assets was properly filed with the attorney general.
A blank form for the certificate of dissolution is available for download from the DOS website (currently, it’s Form DOS-1561-f-l).
To apply for approval from the attorney general, you must use a verified petition and, along with the certificate of dissolution, include a final financial report showing the disposition of all of your nonprofit’s assets and liabilities, and any required governmental approvals and fees. (For example, if you’ve done business in New York City, you may need a consent from NYC’s Department of Finance.)
After getting approval from the attorney general, when filing your certificate with the DOS, you must include the attorney general’s approval of the dissolution. You also must include any required consents, such as from the DTF. The DOS charges $30 to file the certificate of dissolution.
Notice to Creditors and Other Claimants
One other part of winding up involves giving notice to creditors and other claimants. Under the N-PCL, you may give notice by publication in a newspaper for two consecutive weeks, and by mailing the same notice to known creditors or claimants. Creditors and claimants generally have at least six months to present claims.
Some of the rules for giving notice and responding to claims can be hard to understand. Therefore, when dealing with giving notice to claimants, you should strongly consider getting assistance from an attorney.
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 certificate 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, filing fees, useful FAQ sheets and other guidance, and mailing addresses and phone numbers (including for the New York State Tax Department’s Corporation Tax Dissolution Unit) on the DOS website and the attorney general’s charities website.
Remember: New York’s law for nonprofit corporations is complex—you should strongly consider getting assistance from an attorney to help you dissolve your organization.
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.