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What Happens to a Nonprofit’s Assets and Funds When It Closes?
What Happens to a Nonprofit’s Assets and Funds When It Closes?
Liz Myers avatar
Written by Liz Myers
Updated yesterday

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.

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