Three Things To Do When Your Nonprofit is Financially Struggling

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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.

Dissolving a Church or Nonprofit in Pennsylvania

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When a church or nonprofit organization comes to the point where it is no longer large enough to sustain its purpose, there are a number of steps to take to properly dissolve it. To avoid creating personal liability for any of the directors or officers, it is important to dissolve the nonprofit organization legally and distribute its funds and property pursuant to Pennsylvania law. This article will give you a few of the steps that are involved so that you can prepare for the road ahead.

At the outset, we should note: this article is meant to give you helpful tips but is not legal advice. Every situation is different, and you should speak with an experienced nonprofit attorney who can help you through the process.

1. Take an Official Vote of the Board of Directors/Members

Who gets to decide to dissolve the nonprofit? Under Pennsylvania law, your organization can either be member-run or run by the board of directors. Whoever holds the power should be the body to take the vote. Sometimes organizations take a vote of both, and this isn’t bad if everyone is in agreement. However, you can create a conflict where the board votes for dissolution and the members vote against it.

In most cases, if you have members of your organization, they’re probably the body empowered to vote to dissolve the corporation. In old-style nonprofit corporations, there were even stock certificates that were held by members, and their voting share was often different depending on how much stock they held. In most modern organizations, this is no longer the case. Regardless, members vote in a member-run organization on a major decision such as a total dissolution.

Churches can be a particularly confusing situation because they may have “members” who are not members within the meaning of Pennsylvania nonprofit law. To be sure, check your articles of incorporation and see if your organization was elected to be a member organization or not. You should also consult your by-laws. If there is a conflict between these documents, it’s important to discuss this situation with your attorney.

Once you’ve taken a vote, you need to document the vote. For a board of directors, this usually involves either meeting minutes or a corporate resolution documenting that everyone is in agreement (or noting the number of dissenting votes and showing that you had a majority). For a member vote, it’s important you have some sort of meeting minutes kept by a secretary, documenting the precise vote. This is done so that there can be no question that it was agreed that the organization should be dissolved.

2. Obtain Tax Certificates

For most nonprofits and churches, this part won’t be an issue, but you will need to ensure that you have no outstanding tax due to the Pennsylvania Department of Revenue or the IRS. You may be wondering how a nonprofit could ever owe taxes. In most cases this has to do either with property tax for a property that was never granted tax-exempt status or for sales tax that was collected as part of some sort of business venture. There are other times that taxes can be collected from a nonprofit that are fairly rare. However, you should still obtain tax clearance certificates through the Bureau of Charitable Organizations in Harrisburg. Having these certificates will smooth the process for the rest of the way.

3. Obtain Attorney General Approval

The Attorney General of Pennsylvania is granted power by statute to oversee all nonprofit organizations in Pennsylvania. This means that the Attorney General has the power to review dissolutions, mergers and other major changes to nonprofits. The idea of the Attorney General’s approval is based on ensuring that a non-profit does not collect donations and then simply dissolve, either giving those donations to a private party or giving that money to a nonprofit for a totally different purpose.

As a simple example, one could imagine that a nonprofit collecting money for a conservative cause and shutting down only to give that money to a liberal cause would incite a lot of consternation among individuals who’d given large amounts of money to the initial organization. Similarly, if a church were to shut down and give all of its money to an atheist organization, there would be many donors who would be wronged. The Attorney General’s approval is usually not hard to obtain, and simply requires showing that the final funds are being given to a similar organization.

4. Obtain Court Approval to Sell Real Estate

As an important part of the process, any real estate owned by the nonprofit or the church needs to be sold and the sale or transfer will need to be court-approved. In many cases, a buyer will insist on court approval before the sale goes through, as title companies typically don’t insure purchases from dissolving nonprofits until the court order is obtained.

This is sometimes known informally as a “comfort order,” because even in situations where it is not legally required under Pennsylvania law, buyers and other third parties are often not comfortable until it is obtained.

5. Ensure that Money Left Over is Transferred to a Similar Nonprofit

As discussed above, dissolving nonprofits should typically give their money to a similar organization. Churches often choose a church within their denomination or a church with similar doctrine. Nonprofits look for organizations with similar missions. A veterans group that is winding up will look for other groups that serve veterans, for example.

Another factor to be considered is geography. If your nonprofit serves the people of one county, a nonprofit that will be similarly invested there is a good choice. Ultimately, the Attorney General’s office gives broad latitude to the choice as long as it is a similar nonprofit, and as long as no one person is taking personal benefit from the dissolution.

Having said that, there is an appropriate way to pay out salary and other costs to the executive director, pastor or other employees of a nonprofit. Many of these individuals may have spent years trying to keep the nonprofit afloat during difficult times. There are legal ways to pay out extra salary, bonuses, and even retirement funds or annuities for these individuals without running afoul of the rules.

Conclusion: A nonprofit attorney can help dissolve your entity

When it comes to winding up a nonprofit, there are many choices you’ll face. Contact the attorneys at Cornerstone Law Firm for a full review of your situation and to discuss next steps in your process.