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 that every applicant for tax-exempt status 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 for this language is to guarantee that any net earnings or assets held by a nonprofit organization will not benefit any individual or private shareholder; instead, they 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 having one will eliminate the problem of not having it when the time comes to apply for the federal tax-exempt status. In addition, it's a good idea to plan for the eventuality.
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:
You may indicate that upon dissolution of your organization your funds will go to another organization that you name in your articles. The advantage of this option 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:
