Three Ways to Reorganize a Nonprofit
If your nonprofit is trying to find ways to accomplish new goals or is struggling, it might be time to restructure. Restructuring and reorganization can take on different forms, but they usually involve an intentional desire to change direction. Choosing which method to reorganize your nonprofit can be a challenge. There are three primary methods:
- “Internal” Restructuring
- Bankruptcy: Chapter 11 Reorganization
- Custodianship
Restructure is the term we use to denote an “internal” change in the way things are operated, like adding or subtracting a new program line. Reorganize is the term we use for a more formal process, usually involving a neutral third party and a court. We’ll walk through the basics of the three methods, but to learn exactly what’s right for your unique situation, we recommend consulting a qualified attorney.
“Internal” Restructuring
When an organization is trying to establish a larger foundation for future growth, or significantly change the way it operates its governance or its programs, then restructuring is in order. This commonly involves changing the board governance (committees, meeting frequency, etc.), eliminating program lines, adding program lines, or adding subsidiary or affiliate entities. Most of these changes require amendments to the organization’s bylaws, and may also require filings with the secretary of state, attorney general, Internal Revenue Service or other regulators.
Bankruptcy: Chapter 11 Reorganization
Chapter 11 bankruptcy is sometimes appropriate when the nonprofit organization believes that it can continue operating once its outstanding liabilities have been reorganized/restructured. Chapter 7 bankruptcy should be used when the nonprofit organization needs to fully liquidate and close, which you can read about in our previous post. Although a bankruptcy court has the legal authority to modify contracts, a Chapter 11 bankruptcy court does not have an ability to discharge any debts that have not been paid in full through the reorganization process. Bankruptcy does have the advantage of causing creditors to immediately stop collection attempts due to the bankruptcy stay. Chapter 11 is usually the most expensive process to reorganize the debts of the organization. Bankruptcy does not take the mission of the organization into account, other than through the preservation of assets and the corporate entity itself.
Custodianship
Custodianship (and receivership) are based in state law. Custodianship is where a custodian is appointed to manage the affairs of the nonprofit with an eye towards salvaging it as a going concern and handing control back over to a nonprofit’s board, rather than liquidating all assets and closing the organization. Receivership involves the appointment of a receiver to liquidate assets and close the organization, which is described in our previous article. Receivership is an often expensive processes that—like bankruptcy—do not take the mission of the organization into account.
When selecting the right method or reorganization and restructuring for your nonprofit organization, it’s best to take into account the reasons for the desired reorganization, as well as 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.
