Here is a quick overview of the main steps to dissolve and wind up a 501(c)(3) nonprofit corporation under Connecticut law.
Note: Connecticut nonprofit corporations are one type of Connecticut nonstock corporation. A nonstock corporation, unlike a typical for-profit corporation, does not issue any capital stock. The laws for dissolving nonprofit corporations are part of Connecticut’s more general nonstock corporation law.
Closing starts with dissolution, and to dissolve your nonprofit, you will need a proposal to dissolve. You also will likely need a plan of distribution that indicates how the nonprofit’s remaining assets will be distributed after all creditors have been paid. With the proposal and plan in hand, Connecticut law provides for voluntary dissolution as follows:
Under the first method, the board first must adopt the proposal to dissolve and then submit it to the members. The members then generally meet and vote to approve the proposal. Alternatively, members can provide unanimous written consent for the resolution without meeting. The procedure for approving a plan of distribution is essentially the same.
Under the second method, it is up to the board alone to approve the proposal to dissolve. Typically, the proposal must be approved by a majority vote of the directors. The procedure for approving a plan of distribution is the same.
Make sure to properly record the proposal to dissolve, plan of distribution, directors’ votes, and, where necessary, members’ votes or written consents. You’ll need this information for filings with the state and the IRS.
Certificate of Dissolution
After your nonprofit has approved dissolution, you’ll need to file a certificate of dissolution with the Secretary of State (SOS). The certificate of dissolution must contain:
A blank form for the certificate of dissolution is available for download from the SOS website. There is a $20 filing fee.
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.
Generally speaking, you can only distribute money and property after you have paid off all of your nonprofit’s debts. Also, you must obtain statements from the Department of Revenue Services (DRS) and Department of Labor (DOL) before making any final distributions. The statements must show that your nonprofit has paid all required taxes and contributions, or is not liable for any taxes or contributions. For example, you can use DRS Form TPG-170 (Business Taxes Status Letter Request) to obtain a letter of good standing regarding state business taxes. For more details, you should contact the DRS and DOL.
For asset distributions, there are specific rules you 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 requirements for distributions, including items contained in your plan of distribution, may also apply. If you have any questions, you should consult with a lawyer.
Notice to Creditors and Other Claimants
One other part of winding up your dissolved nonprofit involves giving notice to creditors and other claimants. Giving notice is optional. However, doing so will help limit your liability and also allow you to more safely make final distributions of remaining assets. You can mail notice directly to known claimants after dissolution. You can also give notice to unknown claimants by publishing in a newspaper.
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, proposal to dissolve, and plan of distribution. 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 guidance, check out Every Nonprofit’s Tax Guide, by Stephen Fishman (Nolo), go to the IRS website, or consult with a tax professional.
Dissolution will not stop lawsuits started by or against your nonprofit before dissolution. Moreover, new legal actions can still be started by or against your nonprofit generally up to three years after dissolution.
This article covers only the most basic steps of voluntary dissolution after your nonprofit has started doing business. There are many additional, more specific rules, covering things like:
In addition, your certificate of incorporation or bylaws may contain rules that apply instead of, or along with, state law. You are strongly encouraged to consult with a lawyer to obtain additional information on these and other points.
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.