Three Things To Do When Your Nonprofit is Financially Struggling
Is your nonprofit organization at the point where you are considering winding it down and you are not sure what to do? Do you have any options about how to use the money in the accounts and the assets that you own in order to preserve the nonprofit? Here are three things you can consider doing if you are at a crossroads determining whether to shut your organization down or to continue its mission.
1. You can continue using the funds for a more limited purpose within the scope of your nonprofit.
When you are in possession of donor funds, you have to be very careful to continue using those funds for the purposes they were given. The IRS has strict rules about using the funds for the reasons they were given, and the Commonwealth of Pennsylvania may also investigate what you have done with funds. However, you may certainly redirect your funds toward one of your several missions if you find that it’s hard to do everything your organization used to do.
For example, consider a hypothetical organization with a broad mission to help homeless individuals. The organization provides housing subsidies, pays utilities to keep people out of homelessness, runs a food kitchen and raises awareness through public advertising campaigns. If this organization finds that their staff are no longer able to handle the scope of this mission, or that they are receiving too many (or too few) requests for utilities, they might continue running their smaller food kitchen and redirecting the funds toward that piece of their work.
The IRS and Commonwealth of Pennsylvania have generally recognized the use of funds towards one of your several missions as an appropriate use of donor funds. The exception would be if a donor gave money specifically for a purpose and does not consent (or cannot consent since they passed away) to the redirection of those funds to a separate purpose. For example, if a donor gave specifically for an advertising campaign, it may be a problem on both the governmental level and as a potential breach of an agreement with the donor to put that money into a food kitchen.
2. Consider redirecting the organization’s internal purposes.
Although you must be careful, as we said above, about using funds for different purposes than why donors gave them, the IRS and the Commonwealth of Pennsylvania have also generally approved the redirecting of an organization’s purpose. By appropriately changing your bylaws, filing appropriate documents with the department of state, and announcing to the general public your change in focus, you could change your organization.
For example, an organization that focused on veterans and received donations for veterans could redirect its focus toward global hunger. However, doing so would generally need to be a permanent shift in focus and would need to ensure the monies that were donated were going to that purpose rather than anything else.
This type of redirection is best done with the help of a lawyer to ensure that:
- past obligations are met,
- that the new direction is still approved within the nonprofit code and the 501c3 rules,
- and that your organization cannot be accused of redirection toward any specific board member or officer’s personal pet projects.
3. You can wind up the organization and donate the remaining funds to a similarly-situated nonprofit.
Finally, however, if your organization is at the point where you feel that it can no longer operate due to waning donor interest or for other reasons, it may be appropriate to “wind down.” You can go through the process of “winding up” (or “winding down”) the nonprofit, paying off any debts, discharging any creditors, selling off any assets or land, and then donating any remaining finances to an appropriate nonprofit. In such cases you can pay the expenses of this process including legal fees, expert fees, realtors, and others out of the nonprofit’s funds. You can also continue paying salaries to those involved in winding up the nonprofit. In addition, there may be other ways to appropriately divert those funds into short term projects even while you are winding up the organization.
To find a similarly-situated nonprofit can sometimes be difficult, especially if your organization is fairly unique. Churches tend to look for other churches of similar values, and organizations try to find local nonprofits that do similar work. You should consult an attorney with nonprofit experience on how to select a similar organization to avoid running afoul of state and federal rules.
Conclusion: Contact Cornerstone Law Firm for a consultation
If you run an organization that is considering its options with dwindling finances or wants to consider refocusing the organization, contact Cornerstone Law Firm for a consultation. Our attorneys can help walk you through the process of winding up or figuring out how to donate money to likeminded organizations and redirecting funds appropriately to other uses.