A nonprofit organization is a public entity. Unlike a for-profit corporation, a nonprofit is not owned by individuals and it cannot simply convert to a for-profit business. Its officers and employees may manage the organization's day-to-day operations but they have no ownership interest. When a nonprofit corporation is formed, its organizing documents must state that the organization's activities will not benefit any particular individual, and upon dissolution, the assets must be distributed to another nonprofit. If you no longer want to operate as a nonprofit, you must dissolve the organization and form a new corporation.
Vote to Dissolve the Nonprofit
Closing a nonprofit corporation is a major decision that may not be made by an individual. If a board of directors is in place, those individuals will decide whether or not to dissolve the organization. The board should make a record of the vote, including the number of votes in favor of dissolution.
Read More: Nonprofit Code of Conduct
File Articles of Dissolution
The next step in the process of winding down a nonprofit organization is filing articles of dissolution in the state where the nonprofit was incorporated. Contact the Secretary of State to determine which forms must be filed and the applicable filing fees. In most states, a director or officer will be required to sign the articles of dissolution.
Pay Debts and Pay Final Taxes
Because the nonprofit corporation is dissolving, you must pay all the debts of the organization and any final taxes before distributing assets. Notify all lenders and creditors that the organization is closing. If you have employees, distribute final paychecks. File final annual reports or tax returns with the state. If you are registered as an exempt organization with the IRS, you must likewise file a final Form 990 and check the "terminated" box at the top of the form.
When a nonprofit organization dissolves, the assets must be distributed to another nonprofit organization. The articles of incorporation may specify which nonprofit organization or agency will receive the assets. If not, it will be up to the board of directors to choose a recipient. Nonprofit assets may not be distributed to any individual or for-profit entity.
File Articles for the New Corporation
Once the nonprofit is officially dissolved, you may create a new for-profit corporation. This requires filing articles of incorporation with the Secretary of State where the corporation's principal office will be located. You should also research whether the new corporation will be responsible for licenses, permits or registrations. As a for-profit corporation, you'll likely be liable for business income tax, sales tax, and other taxes and fees that you probably were not required to pay as a nonprofit organization.
- Small Business Administration: Steps to Closing a Business
- Internal Revenue Service: Termination of an Exempt Organization
- Internal Revenue Service: Voluntary Relinquishment of Tax Exempt Status
- Internal Revenue Service: Charity - Required Provisions for Organizing Documents
- Small Business Administration: Corporation
Elizabeth Rayne earned her J.D. from Penn State University and has been practicing law since 2009, advising clients on issues ranging from employment law to nonprofit management. For two years, she served as a contributing editor for the "Vermont Environmental Monitor."