How to Close a Nonprofit Organization

Nonprofit organizations generally resist closure, maybe because they're usually founded by people with a vision and a desire to serve the public. Yet, sometimes closing is the right choice.

If your nonprofit's financial health fails and its program quality declines, it's best if you accept the idea of closure before it's a last-gasp necessity. Shutting down a nonprofit involves several stages — some of them formally defined and some of them merely good practices.

  • Take care of your employees. Warn them about the impending closure, and, if possible, provide them with job counseling and severance pay.

  • Take care of your clients. Work with other agencies to make sure that client needs will be met in the future. If you have subscribers or members, offer refunds or work with other nonprofits to honor their benefits.

  • Tell your donors and professional partners. They should hear about your planned closure from you rather than through rumor or through the press. Clear communication of your story must be presented before rumors begin.

  • Pay your debts or negotiate settlements of your obligations before closing. Doing so protects your reputation and the reputation of your board members and also engenders trust in nonprofits as good business partners.

  • Document your work. What's your nonprofit's legacy of services to the field? What has it learned? How can your knowledge benefit others? Consider gathering your information and placing it in a library, school, historical society, or online archive.

  • Celebrate and recognize your staff, board, and volunteers. The people who have contributed their time, labor, and expertise to your nonprofit deserve applause and thanks.

You also need to take a few formal steps:

  • Convene the board. You will need to have a board meeting at which the board votes to dissolve the organization and records that decision in the board minutes.

  • Inventory of all assets — money, furniture, client lists, web domains, costumes, fish tanks, and so on — and pass them on, sell them, or return them appropriately, honoring your donors' intentions if some things were contributed for specific purposes.

  • Complete required paperwork. You'll likely want some technical assistance from a consultant or an attorney to complete required paperwork, because you have certain state and federal requirements to meet:

    • State requirements: You need to file a formal intent to close with your secretary of state or state licensing department. The form of this document varies by state. Check with the agency through which you incorporated on the appropriate steps to take.

    • Federal requirements: Just as you turned to the Internal Revenue Service (IRS) to create your nonprofit, you return to the IRS to shut it down. You must file a final Form 990 tax return within 4 months and 15 days of your organization's termination. As you do so, check the Termination box on the first page of the return, and answer "yes" to the question you find in Part IV (line 36) about whether the organization liquidated, terminated, dissolved, or substantially contracted.

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