For those leading not for profit corporations, it can be hard to face the end. But the end comes for many not-for-profits and for many different reasons. No one likes to oversee the end or do the thankless work of winding up a not-for-profit corporation. If you are leading a not-for-profit corporation and have the unenviable task of winding it up and dissolving it, here are seven things to be aware of:
- Board Member Liability.Board members are legally responsible for putting the interests of the corporation ahead of their own interests and may, in some cases, be held personally liable if they are grossly negligent in their handling of the not-for-profit’s interests. So long as the corporation is legally in existence, board members need to carry out their fiduciary responsibilities to the corporation, this includes the responsibilities attendant to winding the corporation up and dissolving it.
- Dissolution Clauses in Articles of Incorporation and Bylaws. Often not-for-profits have dissolution provisions in their articles of incorporation and bylaws which govern how and when the corporation can be dissolved. Many of these provisions dictate how assets and properties are to be distributed upon dissolution. Not-for-profits can also amend their articles of incorporation to include dissolution provisions if they do not already contain them.
- Dissolving the Corporate Entity at the State Level. Illinois’s General Not For Profit Act has provisions which relate to how a corporation can and should be dissolved. You or your attorney should ensure that all the necessary steps are taken to properly dissolve the corporate entity with the State.
- Notifying the IRS. If your not-for-profit corporation is a recognized by the IRS as 501(c) (3) organization, federal tax law requires the remaining assets of the corporation to be distributed for tax-exempt status purposes, such as to another 501(c) (3) organization. Such organizations are also required to notify the IRS of the dissolution by filing a Form 990 along with supporting documents.
- Account for All the Corporate Debts. Leadership should do a comprehensive review of all existing corporate obligations and debts. It may be necessary to consult with an accounting professional to close out bank accounts, payroll accounts for any employees. and to reconcile the corporate finances.
- Distribute Corporate Property and Assets. Before you dissolve a corporation, it is important that any property or assets are distributed in accordance with the law and that the property or assets do not inure to the personal benefit of board members or other individuals. Develop a plan of distribution and be sure to document everything. In the event property and assets are distributed according to the dissolution requirements for nonprofits, be sure that the intended recipient qualifies to receive the property or assets.
- Maintain Corporate and Confidential Records.Over the years a not-for-profit corporation may acquire confidential records. These should be maintained in strict confidence well after the corporation is closed or dissolved. In addition, it is recommended that leadership maintain corporate records, particularly records relating to how assets were sold or distributed, for at least five years after dissolution as the records may be needed to prove that everything was done properly.
If your not-for-profit corporation would like assistance with the many legal issues that arise when winding up and dissolving the corporation, the attorneys at Dalton & Tomich are here to help.