How to dissolve a nonprofit, step by step

Nonprofits close for ordinary reasons. The founding volunteers move on, a grant ends, or the problem the group was formed to solve has been solved. Closing well protects your board members, honors your donors and keeps charitable assets doing charitable work.

Dissolution is the legal process of ending a nonprofit corporation under state law. It has two tracks that run side by side: the state track, which ends the corporation, and the federal track, which tells the IRS you have stopped operating. This guide covers both, in the order that usually works. State law controls many details, so treat the state examples here as illustrations, not a rule for every state.

Step 1: Get board and member approval

Start with your bylaws and your articles of incorporation. They say who must approve dissolution and by what vote. State nonprofit corporation law sets the minimum.

Board approval is almost always the first formal act. Record the vote in minutes, with the plan of dissolution or resolution attached.

Member approval is needed if your organization has voting members, meaning members who elect the board. If you have none, the board usually acts alone.

Two state examples show how much the details vary:

• California: the first step is approval by a majority of the board of directors or of the members, or both, as the Corporations Code requires for your type of corporation.
• New York: the board adopts a plan of dissolution with a quorum present and a majority voting in favor. If the corporation has voting members, the plan then needs approval by at least two-thirds of the members voting at a meeting with a quorum, or by unanimous written consent.

Your board's duties do not stop when it votes to close. Directors still owe the organization care and loyalty while winding up. See nonprofit board duties.

Step 2: Pay or provide for your debts

Before any assets go anywhere else, the organization must pay what it owes: final wages, rent, vendor bills, loans, taxes and any refunds owed for prepaid programs. Schedule N of Form 990 asks directly whether you discharged or paid all liabilities in accordance with state law.

Make a list early. Include leases with notice periods, contracts with cancellation terms and grants with reporting obligations. Read each grant agreement for final report or refund terms.

Step 3: Distribute remaining assets under your dissolution clause

A 501(c)(3) organizing document must permanently dedicate the organization's assets to exempt purposes. The Form 1023 instructions describe an acceptable dissolution clause as one that distributes assets for 501(c)(3) purposes, or to the federal, a state or a local government for a public purpose. Read your clause and follow it. Our guide to articles of incorporation for a 501(c)(3) shows what these clauses usually say.

The usual choice is another 501(c)(3) with a similar mission. A hypothetical after-school reading program might give its books and laptops to a library foundation and its remaining cash to a literacy nonprofit in the same county.

Assets cannot go to insiders. Nothing may be distributed to directors, officers, members or other private individuals. Schedule N asks whether any officer, director, trustee or key employee will become a director, employee, contractor or owner of the organization receiving your assets, or will receive compensation because of the dissolution. Any "yes" needs a name and an explanation. For the underlying rules, see private benefit and excess benefit.

Keep good records of each transfer. Schedule N asks for a description of each asset distributed, the date, its fair market value, how you determined that value and the recipient's name, address and EIN.

Step 4: Notify the state attorney general where required

State attorneys general supervise charitable assets in many states, and some must review a dissolution before it becomes final. Schedule N asks whether you were required to notify the attorney general or another state official and, if so, whether you did.

California. After the board or members vote, the corporation files a certificate of election to wind up and dissolve with the Secretary of State and forwards it to the Attorney General's Registry of Charities and Fundraisers. The Attorney General then reviews the proposed distribution of assets. To finish, the corporation needs either a written waiver of objections to the distribution or written confirmation that it has no assets. The Attorney General's dissolution page lists the steps and documents.

New York. A corporation with assets submits its plan of dissolution and distribution of assets to the Attorney General's Charities Bureau for approval, or to the state Supreme Court with notice to the Attorney General. The Charities Bureau's guidance, Voluntary Dissolution of Not-for-Profit Corporations with Assets, includes sample plans and checklists.

Other states have their own procedures, so check with your state attorney general's charities office before you distribute assets. California and New York also expect a dissolving charity to bring its charity registration and reporting up to date first; check the same in any state where you are registered. See state charitable solicitation registration.

Step 5: File articles of dissolution with the state

The corporation legally ends when the state accepts your final dissolution filing, often called articles or a certificate of dissolution. The name and the prerequisites vary.

• California: the Secretary of State will not accept the certificate of dissolution without a copy of the Attorney General's waiver of objections letter.
• New York: after the Attorney General approves the plan, the corporation obtains the attorney general's approval of the certificate of dissolution and a consent to dissolution from the state Department of Taxation and Finance, then files the certificate with the Department of State.

Keep a certified copy of the filed document. You will attach it to your final federal return.

Step 6: File the final Form 990

Your last annual return tells the IRS you have terminated. Which form you file depends on your size, and 990IRS.com has a guide to which Form 990 to file. Our guide to annual filing requirements covers the basics.

Form 990 filers check the "Final return/terminated" box in Item B of the heading, answer "Yes" on Part IV, line 31, and complete Schedule N, Part I.

Form 990-EZ filers check the same box, answer "Yes" on Part V, line 36, and complete Schedule N.

Form 990-N filers answer "yes" to the question asking whether the organization has terminated or gone out of business.

Attach proof. The Form 990 instructions require a certified copy of your articles of dissolution approved by the state. If that is not available, attach the board resolutions approving the plan of dissolution.

Watch the earlier due date. When an organization dissolves before the end of its normal year, its final tax year ends on the termination date. The final Form 990 or 990-EZ is due by the 15th day of the 5th month after that date.

A Form 990-N filer that terminates early files its final e-Postcard as soon as reasonably practicable after the start of what would have been its next tax year.

Step 7: File final payroll returns

If you had employees, close out payroll the same way any employer does.

• Form 941 for the quarter of your final wage payment (or Form 944 if you file annually). Check the box showing the business has closed, enter the date final wages were paid and attach a statement naming the person who will keep the payroll records and where they will be kept.
• Form 940 for the calendar year of your final wages, with box "d" (final) checked, if your organization files Form 940.
• Forms W-2 to each employee by the due date of your final Form 941 or 944, with Form W-3 to transmit them.
• Forms 1099-NEC for contractors you paid during the year, if required.

Step 8: Close your IRS account and keep your records

After all returns are filed and any taxes paid, you can ask the IRS to close your business account by sending a letter with your legal name, EIN, address and the reason for closing. Store your corporate records, minutes, final returns and documentation of each asset transfer with a named person. See nonprofit recordkeeping.

501Nonprofit.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.