DISSOLVING A NONPROFIT ORGANIZATION
Massachusetts as an Example
Even for those organizations with minimal assets or activity, the legal process of dissolving a nonprofit organization and closing it down can become protracted and taxing. It may involve obtaining pre-approval from the Attorney General's Office or other officials in a particular state and it may further require securing a court order to authorize the dissolution.
This article provides an outline of the legal steps required when dissolving a nonprofit organization in Massachusetts. While the dissolution process in Massachusetts is more involved than in most states (including the need for regulatory approval), it is instructive as to the process in the many states that actively oversee their nonprofit organizations.
If your organization has exhausted its financial remedies and practical options and is making the difficult decision to formally close down, the basic steps you will need to undertake in Massachusetts (mirroring those in New York, Michigan, Minnesota, California, and several other states) are as follows:
- Make Sure Your State and Federal Filings Are Current.
- Approve Specific Board Resolutions to Authorize the Nonprofit Dissolution.
- Determine Whether there are Assets to be Distributed.
- If No Asset Dissolution: Submit Administrative Dissolution Petition to AG.
- With Assets Dissolution: Identify Similar Charity to Any Receive Remaining Assets.
- With Assets Dissolution: Submit Complaint for Voluntary Dissolution to AG and Court.
Most charities that are incorporated or doing business in Massachusetts must register with the Massachusetts Attorney General's office, and file an annual report known as the Form PC.
A charity considering dissolution should ensure that it has properly registered with the Attorney General's Office, and that Forms PC for its most recently completed four fiscal years have been properly filed. The Massachusetts Attorney General has a searchable database for this purpose.
The board of directors (or the governing body) by majority vote, must approve specific resolutions authorizing the dissolution. If your organization has voting members, their authorization of the dissolution may also be required.
The dissolution procedure for a public charity will fall into one of two categories: "With Assets," or "No Assets." In order to determine which applies, the charity must calculate the amount required to pay all of its debts and liabilities, and estimate legal, accounting, filing, and other fees and expenses that will be necessary to complete the dissolution. If, after setting aside that amount, the charity will have no assets remaining, it may follow the "No Assets" dissolution procedure. If there will be assets or funds remaining, the "With Assets" dissolution procedure is required.
For a charity without remaining assets, the dissolution procedure in Massachusetts involves review and approval by the Attorney General's Office, without the Court's involvement. The charity submits the Administrative Dissolution Petition, along with the required related documents and the Final Form PC (Form PC-F) which details all financial activity from the end of the most recently completed fiscal year to the current. If the Attorney General’s Office is satisfied that the funds have been properly expended for the charitable purposes and there are no assets remaining, the petition will be approved and the Final Notice of Dissolution is issued, a copy of which is then attached to the charity's final IRS Form 990 which must be filed within 4 ½ months after the date of the Final Judgment of Dissolution, and filed with the Massachusetts Secretary of the Commonwealth and the Massachusetts Department of Revenue (and any other agency to which the charity reported).
The board must also identify and approve the charity or charities that will receive any remaining assets. Note that under both state and federal laws, receiving charities must have a similar mission, or agree to use the assets for purposes that are similar to those of the dissolving charity. The dissolving charity must take care that it does not distribute any of its assets outside the course of its normal program activities, prior to obtaining Court approval to do so. For example, if the board is considering a dissolution, the charity should not make grants or donations outside the course of its usual activities. The charity may, however, continue with its regular program activities until the board determines to cease such activities.
If the charity has any remaining assets (after it sets aside adequate funds to pay all remaining debts, liabilities, and obligations, and cover dissolution fees and expenses), the charity prepares and submits to the Attorney General's Office, a Complaint for Voluntary Dissolution, with the related pleadings. The Complaint must provide, among other things, a detailed description of the reasons for dissolution, focusing on the impossibility or impracticality of continuing the business.
If the AG approves the dissolution, the charity then files the Complaint with the Massachusetts Supreme Judicial Court, together with a Motion for Interlocutory Order (to which the Attorney General and the receiving charity must also agree). The Motion for Interlocutory Order requests the Court to authorize the dissolving charity to transfer its remaining assets to the designated receiving charity. If the Court is satisfied that the receiving charity will use the funds for purposes similar to those of the dissolving charity, the Court authorizes the transfer.
Upon completion of that transfer, the dissolving charity and the receiving charity prepare affidavits of compliance and receipt. The dissolving charity then files these affidavits along with a Motion for Entry of Final Judgment of Dissolution with the Court. If the Court is satisfied that the transfer was properly completed, the Court enters the Final Judgment of Dissolution.
A copy of the Court's Final Judgment is attached to the dissolving charity's final IRS Form 990 and filed with the IRS within 4 ½ months after the date of the Final Judgment of Dissolution. A copy of this Final Judgment is also filed with the Massachusetts Secretary of the Commonwealth and the Massachusetts Department of Revenue (and any other agency to which the charity reported).
While the process of dissolving a nonprofit organization may become lengthy and involved, it is intended to protect the public's interest in charitable funds and, not insignificantly, to protect the charity's officers and directors. The discussion above is intended only as a broad overview of the statutory and regulatory requirements for dissolution of a Massachusetts nonprofit organization and is not intended as a step-by-step instruction guide. There may be other specific requirements at each step as well as exceptions and exemptions in your particular circumstances or state.