When a nonprofit dissolves, what happens to its assets and remaining funds is a critical legal and ethical concern. Because nonprofits operate for public benefit and enjoy tax-exempt status, their assets cannot be distributed to private individuals or board members upon dissolution. Instead, they must be transferred according to IRS regulations and state laws.
Step 1: Settle Debts and Liabilities
Before distributing assets, the nonprofit must:
Pay outstanding debts, contracts, and obligations.
Settle employee wages and benefits.
Resolve any pending legal matters or compliance issues.
Step 2: Distribute Remaining Assets
Once debts are settled, remaining assets must be transferred to another nonprofit or charitable cause. Acceptable options include:
Another 501(c)(3) Nonprofit – The assets must be given to another IRS-recognized tax-exempt organization with a similar mission.
Government or Public Use – In some cases, assets may be transferred to a government entity for charitable or public benefit.
Granting Remaining Funds – Some dissolving nonprofits establish a one-time grant to a like-minded charity.
Important: Assets cannot be distributed to board members, founders, or donors for personal use. Doing so could result in IRS penalties and legal consequences.
Step 3: Notify the IRS and State Authorities
Dissolving a nonprofit requires official filings with:
The IRS
State Agencies
Attorney General/Charity Division
What Happens If a Nonprofit Mishandles Assets?
If a nonprofit fails to follow legal dissolution procedures, its board members could face:
Legal liability for improper asset distribution.
IRS penalties for violating tax-exempt rules.
State enforcement actions for mishandling charitable funds.
Final Thoughts
Dissolving a nonprofit requires careful planning, legal compliance, and ethical asset distribution. If you need guidance on closing your nonprofit properly, InstantNonprofit is here to help! Reach out to ensure a smooth and compliant dissolution process.