How to Dissolve a Maine Nonprofit Corporation
Reprinted with permission from The Maine Nonprofit Law E-Bulletin March 2022, by Robert H. Levin, Attorney-at-Law with the Law Office of Robert H. Levin.
Nonprofits come and go, and that’s a good thing. In a dynamic world, it is perfectly healthy for new organizations to spring forth in response to budding energy around an idea or a need, and for others to be laid down when such energy wanes. As an attorney specializing in nonprofit organizations, I field frequent questions about how to dissolve a nonprofit. Here are some guidance and tips if your nonprofit is considering winding down.
There are two chief ways, formal and informal, to lay down a Maine nonprofit corporation. The formal method involves a series of steps, including a Board decision, filing two specific forms with the Maine Secretary of State (the Statement of Intent to Dissolve and the Articles of Dissolution), and filing a final IRS Form 990. Although not especially difficult, there are enough technical aspect to the Secretary of State filings that it usually is worth it to have the assistance of an attorney if taking the formal approach.
The informal path is one of inaction, whereby the nonprofit is administratively dissolved for failing to file an Annual Report with the Maine Secretary of State, and loses its 501(c)(3) status for failing to file an IRS Form 990 for three consecutive years.
Which approach is better, the formal or informal? There’s no universal answer. For small organizations that are required to file only the Form 990-N e-postcard and not the 990-EZ or full 900, and where there is no debt or other complications, I often recommend the informal approach as the simplest and most economical path. For mid-size or large organizations, the formal approach is usually more appropriate. The filing of a final 990-EZ or full 990 is especially important, because there are financial penalties for failing to file on time, and these penalties would constitute a liability that complicate any dissolution (see below). The 990-EZ and 990 also require reporting certain dissolution information on Schedule N. In contrast, there is no financial penalty for failing to file the 990-N, only revocation of 501(c)(3) status after non-filing for three consecutive years. But if the intent of the organization is to dissolve, then the loss of 501(c)(3) status causes no harm.
Whether the formal or informal approach is taken, it’s important to keep in mind two key principles: First, the nonprofit must make sure to resolve all liabilities and pay off all debts before dissolving. In fact, the forms filed with the Maine Secretary of State include a requirement that there are no outstanding liabilities. Second, any remaining funds and property must be disbursed in accordance with its Bylaws and Articles of Incorporation. For 501(c)(3) organizations, these documents require that such funds be transferred to another 501(c)(3) organization or to a governmental agency. If the organization owns real estate, then there must be a formal deed to convey the property, and the assistance of an attorney is strongly recommended.
Some other dissolution tips:
- The decision to dissolve should also be documented in the minutes of a final Board Meeting, and these minutes should be read aloud and approved at the conclusion of the final meeting.
- If the organization has purchased insurance policies, then the Board might wish to purchase tail policies to cover any claims against the organization or its directors that might arise after the dissolution.
- The Board should craft a plan for who will maintain custody of key records after the dissolution, and this plan should be documented in the minutes of the final Board meeting. Just because the organization is dissolved doesn’t mean it cannot be sued, so maintaining key financial and other records is important. Records can be held by the Secretary, or any other responsible individual, and there should be an online or physically separate backup of any records. I generally recommend that such records be maintained for six years, which covers the applicable statutes of limitations for most Maine and federal legal actions.
- Even after the dissolution forms are filed with the Maine Secretary of State, the Board officers can wind up the affairs of the organization, such as transferring funds, closing bank accounts and other service accounts, etc. So it’s not essential to sequence all of the closing steps prior to the filing of the dissolution forms.
Still looking for more guidance? Find additional resources on MANP’s webpage on dissolving a Maine nonprofit, including a white paper I authored with a checklist.