Q: We are disbanding our organization. We are a 501c3. Is there anything special we must do prior to closing our doors? What about regarding the distribution of our assets?

A: This must have been a difficult decision for the board. Sometimes, however, it is clearly the best decision to make.

There are several things to consider. Let’s start with whom you must communicate. You are obligated to notify both the Internal Revenue Service and the State. To let the IRS know about your decision send a letter to the office of Exempt Organizations Determinations (PO Box 2508, Cincinnati, OH 45201). At that time you might also request a determination letter or private ruling regarding any potential tax consequences your organization faces by dissolving. Of course, you don’t want to forget to file a final 990. When you do, be sure to check the box “Final Return” in the heading area of page 1. To ensure that you are doing everything by the book you may call the IRS Tax Exempt and Government Entities Customer Account Services office toll-free at 877-829—5500.

In each state, who to contact and what must be done will be slightly different. Here in Florida, you must file Articles of Dissolution through the Florida Department of State, Division of Corporations. You can download that form by going to www.sunbiz.org and clicking on “download filing forms.”

I would certainly also send a letter to your supporters and clients explaining the decision to dissolve. I would stress your accomplishments over the years and thank people for the part they played in helping to change the community for the better. You can refer them to other organizations that have a related mission and similar values.

Before you can dissolve, you must ensure that all your creditors are paid. Look at your outstanding contracts. There may be a time that is better than others to actually cease operations. Determine if there is any room for negotiation on these outstanding contracts.

If part of the reason you are closing your doors is that you couldn’t sustain the organization financially, this will require you to sell whatever assets can be liquidated in order to meet your obligations, including any penalties for early lease terminations and so on. While you probably don’t have the luxury of waiting to get the best possible prices for what you are selling, you can’t afford to sell at “rock bottom” either. Someone could claim that you are failing to meet your duty of care – to make the best possible decisions on behalf of the organization. Conceivably, they could file a lawsuit against each of the directors personally to make up the income perceived as lost to the community’s benefit.

By law, whatever remains in terms of cash or tangible property must go to another exempt organization. (This means that whoever is helping to close the office can’t just take home any of the leftover items!) Many governing documents will indicate that the organization designated to receive your assets should have a related mission. As board members, you must also consider if the organization will use your assets in a way that stays as true as possible to your donors’ wishes.

You have a real job ahead of you. I wish you luck.

Readers, please note: The above information is critical if your organization is in the midst of, or contemplating, a merger. Depending on how the merger is structured, one or perhaps both of the organizations will be dissolved. Generally, if one organization absorbs the other the assets of the absorbed organization go to its merger partner. In such a case, the remaining entity may be willing to also take on any debt owed by the first organization rather than forcing a sale. The remaining entity usually recognizes that the donor list, volunteers, supplies and so on that are received as a result of the merger were probably the impetus for the merger and thus more than compensate for the debt.