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.