Dissolving a Nonprofit – What You Need to Know

Dissolving a nonprofit in California involves several steps. From obtaining approval to dissolve the nonprofit, to filing all required legal documents with the Secretary of State and the Attorney General, winding up a nonprofit can be a tedious task. Read on to learn more about what you need to know when dissolving a nonprofit in California.

The Process of Dissolving a Nonprofit

Dissolving a nonprofit is different from dissolving a for-profit company. Because a nonprofit is a tax-exempt entity, its assets cannot be distributed among business members. Instead, when dissolving a nonprofit, all of the nonprofit’s assets must be transferred to a similar nonprofit. Complete the following requirements to dissolve your nonprofit:

Vote for Dissolution of the Nonprofit

In California, a nonprofit can be dissolved in one of three ways:

1. By a majority approval of the nonprofit’s members
2. By an action of the directors followed by consent of members
3. By a vote of directors in the event the nonprofit does not have members

A vote to dissolve the nonprofit by written ballot must be completed by a majority of members under the first option above. Under the second option, the board will approve the resolution to submit to members. The members then meet and vote to approve the resolution. Under the third method,  the board solely approves the resolution. In addition, the Board of Directors can elect to dissolve a nonprofit under the following circumstances:

1. A court determines that the nonprofit is bankrupt.
2. The nonprofit has not conducted business within 5 years preceding the resolution.
3. The nonprofit Articles of Incorporation require dissolution.

File Final State Tax Return and Verify Status with Franchise Tax Board

The passage of Assembly Bill 2341 in September, 2006 resulted in changes to the Revenue and Taxation Code. With this amendment, when dissolving a nonprofit, the Franchise Tax Board no longer requires a “Tax Clearance Certificate.” It should be noted, however, that dissolution documents cannot be filed for a suspended corporation.

Prepare Certificate of Dissolution to Wind Up and Dissolve Nonprofit

Next, once the resolution to dissolve has been approved, file a Certificate of Election to Wind Up and Dissolve with the Secretary of State. Send a copy of the Certificate to the Attorney General. The Certificate must state that the nonprofit has elected to wind up and dissolve and who approved the resolution to dissolve. The Certificate does not have to be filed if the election to dissolve is approved by all members or directors in the event the nonprofit has no members.

Clearance from the Attorney General

Notice of the election to dissolve must be provided to the Attorney General and creditors. Notice also must be provided to members who did not vote. Once all of the nonprofit’s debts are paid, the remaining assets will have to be transferred to another nonprofit. The Board must seek a written waiver of objections from the Attorney General of the nonprofit’s proposed distribution of assets. The Board must send the Attorney General a letter that includes the following:

• The organization that will receive the nonprofit’s assets
• A signed copy of the Certificate to Wind Up and Dissolve
• Copy of the nonprofit’s IRS Form 990 covering the last three accounting periods
• An endorsed filed copy of the nonprofit’s Articles of Incorporation

Assets must be distributed according to the Articles of Incorporation and By-Laws of the dissolving corporation and the Attorney General’s written waiver letter, and are subject to any trust under which the assets are held. In addition, The Board must pay any outstanding taxes and file final returns.

The intended recipient of the nonprofit’s assets must 1) have the same IRS exemption as stated in the Dissolution clause of the dissolving corporation’s articles of incorporation and 2) be current in reporting obligations to the attorney general’s Registry Of Charitable Trusts, if required to register and report.

Notify the Registrar of Charitable Trusts

Next, send a certified copy of the filed Certificate of Dissolution to the Registry of Charitable Trusts, a division of the Attorney General’s Office. The packet should contain: (a) a copy of the Certificate of Dissolution endorsed (stamped) by the Secretary of State; and (b) the final financial report for the corporation showing that all assets were distributed properly, resulting in a zero balance.

Contact A People’s Choice to learn more about dissolving a California nonprofit and how we can help. A People’s Choice can help prepare and file the required Certificate to Dissolve with the California Secretary of State. We can also help with obtaining the necessary clearance from the Attorney General’s office and complying with the noticing requirements. Call us today at 800-747-2780.