Planning for the End—While Meeting IRS Standards!

Although it may seem odd to plan for exactly how your organization will end just as you are preparing to begin, the IRS requires every applicant for tax-exempt status to include a clear plan for dissolution in its articles of incorporation. Everyone involved must understand how money or other assets will be handled if or when the organization decides to stop functioning and elects to dissolve. The underlying reasoning is to guarantee that any net earnings or assets held by a nonprofit organization will not benefit any individual or private shareholder; instead, these funds will be distributed to another organization that also has a 501(c)(3) status.

Not every state requires a dissolution clause in the articles of incorporation, but you are still going to need it to apply for the federal tax-exempt status. In addition, it's a good idea to plan for the eventuality.

Option A

You can indicate that upon dissolution of your organization, you will distribute any remaining assets to another 501(c)(3) organization that will not be identified until your organization formally dissolves. This option can be tricky because it leaves a very important decision to people you may not know, people who may choose to distribute funds in a way that is counter to the wishes of the current board. Further, if the organization does not formally dissolve but simply ceases operation, the last board may lose control of the remaining funds and a court will have to determine the final disposal.

Here is some sample dissolution language that meets IRS standards:

Upon the dissolution of this organization and after payment of all outstanding debts of the organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose.

Option B

You may indicate that upon dissolution of your organization your funds will go to another organization that you name in your articles. The advantage here is that your organization can be certain that another nonprofit with a similar mission and overall approach will be the recipient of your assets and that the decision will be made when everyone is thinking clearly. You can include language to the effect that if that organization is no longer in existence or chooses not to accept the distribution, your board may then select another group.

An organization may amend its articles of incorporation as often as it chooses, as long as the amendments do not stray outside the boundaries of what is legal for a nonprofit corporation to do in the state in which it is incorporated.

If your board would like to specify an organization that already has its federal tax-exempt status to receive any distribution of assets, possible language for your dissolution clause might be as follows:

Upon the dissolution of this organization and after payment of all outstanding debts of the organization, the remaining assets shall be distributed to the ABC Society for Good Deeds, of 123 Main St., Hometown, OK, a 501(c)(3) organization. If, however, the ABC Society for Good Deeds is not, at that time, in existence, is no longer exempt from federal income tax, or for any reason is unwilling or unable to accept the distribution, then the assets shall be distributed to an organization that has a current 501(c)(3) determination to be selected by the board of directors.

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