The Five Methods to Dissolve a Nonprofit
This is part of our seven part series. This series covers when to close a nonprofit, methods of dissolving, methods of reorganizing, insolvency, deepening insolvency, receivership, and tips for nonprofits involved in receivership cases.
Once you’ve made the difficult decision to close your nonprofit organization, a thousand questions arise. How do we close the organization? What’s the best way to close with dignity and leave a lasting positive legacy? To close your nonprofit properly there are several methods:
- Voluntary Dissolution
- Judicial Dissolution and Liquidation
- Bankruptcy: Chapter 7 Liquidation
- Assignment for the Benefit of Creditors (often called ABC)
In this post, we’ll explore the basics of each method of dissolution and liquidation. Dissolution is the closure of a nonprofit. Liquidation is the selling of its assets, usually to pay debts or liabilities. These processes differ greatly depending on your local jurisdiction. To learn exactly what’s right for your unique situation, we recommend consulting a qualified attorney.
If your nonprofit is still able to pay what you owe, or if all your creditors have agreed to specific payments to pay off your debts, voluntary dissolution could be the right option for you. You will likely be able to preserve the programming and mission, perhaps by building referrals with other agencies or by transferring certain assets to them to help in the continuation of the program. Ultimately, however, you’ll need to vote to dissolve, file articles of dissolution with the secretary of state, and implement a plan of dissolution. The plan of dissolution should include things like coordination of final filings, putting the attorney general and creditors on notice of the dissolution, ensuring all creditors are paid, and transferring net assets to another charity. This is known as the wind-up process.
Judicial dissolution is best when the organization’s debts are more than the remaining assets, especially if there are multiple creditors that hold different types of debt as related to the nonprofit. This can be a good alternative to bankruptcy in certain scenarios, as it allows the mission of the organization to be preserved, unlike bankruptcy. Judicial dissolution can also be used by creditors or the attorney general (among others) to force some nonprofits to dissolve if they fail to pay their outstanding debts, become insolvent, are wasting assets or are failing to accomplish their missions. Judicial Dissolution typically contains a quasi-discharge of liabilities at the end, which can give board members a higher degree of confidence that they will not be personally responsible for repaying outstanding debts.
Bankruptcy (Chapter 7)
Chapter 7 bankruptcy should be used when the nonprofit organization needs to fully liquidate and close. If the nonprofit organization is looking to reorganize through bankruptcy, check out our article on reorganization. Chapter 7 allows a bankruptcy trustee to take full control of the organization, relieving the Board of its obligation to continue operations. It can also halt collection attempts by creditors through what is called a bankruptcy stay. Chapter 7 bankruptcy does not discharge any debts that have not been paid in full, meaning your board members could still be personally liable for paying unpaid debts. Chapter 7 also does not actually dissolve the corporation, so an entity choosing to go this route will need to also voluntarily dissolve and go through the wind-up process.
Receivership (and Custodianship)
Receivership and custodianship are often expensive processes that only minimally take the mission of the organization into account. Receivership and custodianship are based in state law. Receivership is similar to Chapter 7 bankruptcy in that it involves the appointment of a receiver to determine the viability of the organization as a going concern and then to liquidate all remaining assets of the nonprofit and close it. The receiver also typically manages the dissolution and wind-up process. Custodianship is the other side of the same coin, but it’s more for the purpose of reorganization, which you can read about in our next article. Like bankruptcy trustees, receivers and custodians take control of the organization.
Assignment for the Benefit of Creditors (ABC)
An ABC (also called a General Assignment) is an alternative to bankruptcy and receivership. In concept the entity assigns all of its assets (including its programming lines) to a trustee exclusively for the purpose of paying off creditors. The trustee then sells the assets and uses the money to pay creditors. This involves the immediate cessation of programming, a disregard for the charitable mission of the organization and possible restrictions of charitable dollars held by the organization, and a potential “feeding frenzy” of creditors because it is a way of preserving assets and getting more money for each creditor. It is cheaper and faster than receivership or liquidation bankruptcy; however, it is done in secret, with no judicial oversight. Nonprofits can get into trouble if they do this without the consent of the attorney general, which is a requirement that is very commonly missed by traditional small-business debtors-rights attorneys because it doesn’t apply to businesses.
When selecting the right method for your nonprofit organization, it’s best to take into account the reason the organization is closing, the remaining assets, and the amount of outstanding liabilities. Our attorneys have the knowledge and compassion to help you assess your situation and select a method so you can preserve your organization’s mission and leave a lasting positive impact for years to come.