Here is a quick overview on the main steps you need to take to dissolve and wind up a 501(c)(3) nonprofit corporation under Virginia law.
Virginia nonprofit corporations are a type of Virginia 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 Virginia’s more general nonstock corporation law.
Closing starts with an action called dissolution. If your nonprofit has members, you’ll need a proposal to dissolve. If your nonprofit doesn’t have members, you’ll need a resolution to dissolve. In either case, you’ll also 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 necessary documents in hand, Virginia law provides for voluntary dissolution as follows:
Under the first method, generally the board recommends dissolution to the members by submitting a proposal to dissolve to them. The members then meet and vote to approve the proposal. The procedure for approving a plan of distribution is the same.
Under the second method, it is up to the board alone to approve dissolution by adopting a resolution to dissolve. The resolution must be approved by a majority of the directors in office. The procedure for approving a plan of distribution is the same.
Make sure to properly record the proposal or resolution, the 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.
After your board (and, where applicable, voting members) have approved the dissolution, you’ll need to file articles of dissolution with the State Corporation Commission (SCC). The articles of dissolution must contain:
A form for the articles of dissolution is available for download from the SCC 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.
Generally speaking, you can only distribute money and property after you have paid off all of your nonprofit’s debts. Then, 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; you’ll need to follow your plan of distribution. If you have any questions, you should consult with a lawyer.
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.
After you’ve finished winding up your nonprofit, you must file articles of termination with the SCC. (In some cases, where very little is needed to wind up, a nonprofit may end up filing the articles of dissolution and articles of termination at the same time.) The articles of termination must include:
A single PDF file containing forms for the articles of dissolution and articles of termination, as well as detailed instructions, is available for download from the SCC website.
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 or 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.
You can find mailing addresses, phone numbers, filing fees, and, of course, forms, on the SCC website.
Be aware that dissolving your nonprofit will not stop lawsuits started by or against it before dissolution. Moreover, for claims or liability incurred prior to dissolution, it may be possible to start new legal actions 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 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.
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.