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Taking Money Out of a Nonprofit During Dissolution

A common question we run across when helping people to dissolve nonprofits is what must be done with the money that is in the nonprofit. If land is sold that belonged to a church, can the land be sold and the money given to a specific volunteer or donor? If a large bank account has accrued over time to a nonprofit, can the nonprofit pick a similar organization to give these funds to? Can you take the money and give it to one of the hardworking leaders of the nonprofit? Are you permitted to return the money to donors? Can you spend it on something completely different?

There are several options for what you can do with the leftover funds at the end of the dissolution process. First, it is important that you do dissolve the nonprofit through legal means. However, once you reach the end of that process there are often monies leftover. When that’s the case you have to be very careful to use those monies in compliance with both state and federal law.

The IRS, in particular, in giving 501(c)(3) status to nonprofits, requires that that money not accrue to the “excess benefit” of any of the leaders of the nonprofit. This means that when measured against the value they create for an organization in a given year, they cannot receive more money in that year than would be typically paid to someone in a similar role at a for-profit entity. The rules are fairly complex and it’s important to consult with a lawyer if you think that you would be running afoul with the IRS’s rules.

As a simple example, if your non-profit’s long-time leader ends up with a car that belonged to the nonprofit, this might be permitted if it is in lieu of the fair market value of the car. The leader can buy the car or can forego salary actually due and owing to accept such an asset.

Second, and perhaps more importantly, the state reviews all applications for dissolution, and a court is called upon to approve the final plan. If a large amount of money is going to the longtime pastor or director of a nonprofit, this obviously will raise some serious red flags, and in some extreme cases could even lead to proposed criminal charges. Accordingly, it is important to make sure that you are following the rules in this area.

This doesn’t mean you cannot take care of a long-term leader of a nonprofit who you feel should be appropriately compensated at the dissolution. One example is where a pastor who helped to strengthen a nonprofit for many years is given a retirement benefit that is purchased out of those funds. An annuity or other long-term instrument could be purchased by the nonprofit to compensate them for years of low-paid service. Another appropriate move would be paying the individual for the work of dissolving the nonprofit over the course of a year or more as the nonprofit is wound down.

Finally, the easiest way to dispose of those funds is to donate them to a similar nonprofit. The court will have to approve this transfer, but courts have generally liberally allowed the choice of a nonprofit that the board of the dissolving nonprofit thinks is appropriately similar. If you are dissolving a church for example, giving to a church that is going through a building phase or needs more room to grow is often approved by a court.

It’s important to make sure that you follow all of the rules when dissolving a nonprofit. At Cornerstone Law Firm our team can help you walk through that process. We welcome you to contact us for a consultation on your nonprofit’s situation.