tombstone

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Dissolution, or the closing of an organization in its current state, is more common than one might think. But when an organization seriously considers ending its life, it’s a difficult and complex process. It is a time of mixed and strong emotions for those involved, including a nonprofit board, senior staff, administrative and line staff, partners, and stakeholders.

An organization has to make the difficult and momentous decision to close for two kinds of reasons: (1) involuntary reasons (e.g., an external shutdown is required, usually initiated through the state’s attorney general’s office or the office of the secretary of state) and (2) voluntary ones (e.g., mission has been achieved, a financial crisis has taken place, board and staff have exhausted their energy and ideas, or internal interpersonal disputes have overtaken an organization).

By federal and state law, nonprofit organizations should outline in their articles of incorporation and bylaws all tasks and responsibilities regarding organizational dissolution, and these policies must be followed. But most nonprofit organizations have not drafted such policies and procedures. The purpose of this article is to outline the steps and tasks involved in dissolving a nonprofit organization. And it may serve as a guide for establishing a protocol for an “honorable and respectful transition for all.”1

Our approach is based on four essential principles:

  1. Like any organizational initiative, dissolution should be carried out with interpersonal integrity.
  2. A successful dissolution preserves an organization’s legacy and contributes to a positive collective memory of the organization.
  3. Laying the groundwork is essential to a successful outcome. Many authors and theorists have addressed this stage of the process. The Gestalt International Study Center discusses balancing the intimate with the strategic2, numerous authors talk about attending to group dynamics, Eunice Parisi-Carew and Ken Blanchard offer the team charter model3, and a model of governance as leadership has also been developed4. But no matter what it’s called or how you choose to address it, we are convinced that organizations must pay as much attention to the process of laying the groundwork for a closure as they should to the tasks of the dissolution itself.
  4. During this process, an organization should rely on a network of professional nonprofit experts, legal counsel, human resources support, and dissolution planning and implementation. While finances may be paramount in the minds of board members and senior staff, relying solely on internal resources may lead to a less-than-satisfactory outcome. Using expert input during the dissolution process can better ensure that all aspects are thoroughly addressed and that a board and staff groups are included in the right way and at the right time.

The process of closing a nonprofit organization takes many months. It is important that those implementing the dissolution are prepared for this time frame and equipped with responses to questions from the community about the status of the process.

The Decision to Dissolve

An organization’s board and senior management must pick up and carry the burden of this difficult emotional process, coordinate, and follow through on each step. This is a critical time for skilled leadership, governance, and generative thinking. Thus the decision must be well informed and thoughtful. For the purposes of this article, we assume that an organization’s board of directors and key staff have exhausted all reasonable alternatives (such as restructuring and downsizing, changes in leadership, mission refocusing, merging with another organization, etc.) and that these deliberations have been documented in official meeting minutes.

The body vested with the power to make the final decision to discontinue an organization’s affairs should be identified in an organization’s official documents (e.g., articles of incorporation and bylaws). The decision must take place at an official meeting that is duly called and documented.

We also recommend that an organization’s board and key staff make the decision to dissolve privately. In the case of a nonprofit membership organization, a board must make a recommendation to membership for its consideration and approval. In most cases, this means that the information will then “go public.” As the dissolution plan develops, key players in the process should keep these information management issues in mind.

While we often advocate transparency, in this case we advise strict information control. A board and key staff must feel safe in exploring all issues without fear that the community or other staff will prematurely hear about plans that may never be implemented. You can imagine the effect on an organization’s credibility if the word were to get out that it was closing its doors, only to have a last-ditch fundraising effort become highly successful. In the meantime, staff may have launched job searches, and key community partners may harbor serious doubts about the organization’s ability to deliver quality services. To ensure solid information management, the question of where meetings take place is also a factor. As a board and senior staff explore the possibility of dissolution, there will likely be strong disagreement, frustration, and sadness. “Sound carries,” and administrative and line staff suspicions may increase because of additional meetings among power groups. Consider the possible ripple effects on the process.

Once the decision to dissolve has been made, board and key staff must have the time to debrief. Throughout the entire process, those who make the decision as well as the implementation team must have ample time and space to address their thoughts. Otherwise, they can’t adequately support administrative and program staff. Left unattended, emotions can give rise to doubts and dissent and, in turn, create additional problems.

After an organization’s board and senior staff have attended to the above tasks and prior to implementing the dissolution process, it’s time to engage in planning. Whenever possible, nonprofit dissolution should not be implemented prior to a solid period of thought and planning. Every board member must recognize that this period of intense work must be completed as soon as possible to minimize leaks and the inevitable increasing concern on the part of staff members who are not privy to the proceedings. Board meetings should take place more frequently. It is critical to establish secure email procedures with unanimous agreement among those involved. Frequent reminders about confidentiality guard against laxness.

An organization’s board should identify a planning group that includes the board chair and CEO as members. The planning group will be tasked with creating a detailed draft of the plan for presentation to the board. In addition, because of dissolution’s legal implications at both state and federal levels, we recommend that at this stage of planning an organization’s board engage legal council for the duration of the implementation process.

Developing a Comprehensive Plan

A plan for nonprofit dissolution should be translated into a formal document that includes several sections. It should be strategic and tactical in nature and must cover all main areas of the process.

Informing Stakeholders and Constituencies

The planning group should identify all the groups and individuals who must be informed about an organization’s closing. Each should have an articulated method of being informed, along with a designated person or group to provide the information and, if needed, required support.

Distributing Assets

The critical task of the disposition of assets must meet the standards of the Internal Revenue Service Code and any applicable state laws. In general, a nonprofi