Here is a quick overview on the main steps to dissolving and winding up a 501(c)(3) nonprofit corporation that is already doing business under Hawaii law. There are different rules and procedures for other types of nonprofits, and for other situations such as an involuntary dissolution.
Closing starts with dissolution, and to dissolve your nonprofit, you will need a resolution to dissolve. The resolution should include a plan of dissolution that indicates how the nonprofit’s remaining assets will be distributed after all creditors have been paid. With the resolution and plan in hand, Hawaii law provides for voluntary dissolution as follows:
Under the first method, the board first must adopt the resolution including the plan and then submit it to the members. The members then generally meet and vote to approve the dissolution. Alternatively, members can provide written consent for the dissolution.
Under the second method, it is up to the board alone to approve the resolution and plan. The default rule is that approval is by majority vote of the directors.
Make sure to properly record the resolution to dissolve, plan of dissolution, directors’ votes, and, where necessary, members’ votes or written consents. You’ll need this information for filings with the state and the IRS.
Initial Notice to Attorney General
You’ll need to file articles of dissolution for your nonprofit, but before doing so you must send the Attorney General (AG) a written notice of your nonprofit’s intention to dissolve. The notice must include a copy or summary of your plan of dissolution. You can’t transfer any of your nonprofit’s assets until the earlier of: 20 days after sending the notice to the AG; written consent to the dissolution by the AG; or something in writing from the AG indicating that it will take no action regarding any transfers.
Articles of Dissolution
After your board (and, where applicable, voting members) has approved the dissolution, and after you’ve filed the required notice with the AG, you’ll need to submit articles of dissolution to the Business Registration Division (BREG) of the Department of Commerce and Consumer Affairs. The articles of dissolution must contain:
A blank form for the articles of dissolution (Form DNP-7) is available for download from the BREG website. The form includes detailed instructions. There is a $10 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. 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 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.
Final Notice to Attorney General
After “all or substantially all” of your nonprofit’s assets have been transferred—in other words, after you have finished winding up your nonprofit—you must send the AG a notice indicating who, other than creditors, received assets. For each recipient of assets, the list must show an address and what assets were 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 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 BREG website.
Be aware that dissolution will not stop lawsuits started by or against your nonprofit before dissolution. Moreover, depending on specific circumstances, new legal actions could still be started against your nonprofit up to five 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 articles 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.