Nonprofit Revenue Recognition

How to Dissolve a Nonprofit Organization

CPAs & Advisors

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A nonprofit organization may wind up its affairs and close its doors for many different reasons. Whatever the underlying reason is, it’s important to follow the proper steps to report the liquidation, dissolution or termination of your nonprofit organization to the IRS and the State of Michigan. The required steps will vary based on details particular to your organization. The purpose of this article is not to discuss every possibility but to overview the basic process.

Several assumptions are made in the following discussion: Your organization is a Michigan nonprofit corporation that is recognized by the IRS as a 501(c)(3), it has been in operation, and is voluntarily dissolving. If this does not describe your organization, please seek additional guidance.

Authorizing Dissolution

When discussions about closing your organization begin, the procedures depend on whether your organization has shareholders or if it was formed on a membership or directorship basis. You can find this information in your articles of incorporation. The Michigan Nonprofit Corporation Act allows voluntary dissolution to be authorized in several ways, dependent upon how the organization was organized.

If your organization has shareholders or members, the board may propose dissolution, unless there is a conflict of interest or other special circumstance, or if the power to dissolve rests with the shareholders and members without action by the board. All shareholders or members must be given ten days’ notice of the meeting and be informed that the purpose of the meeting is to vote on the dissolution of the corporation. The dissolution is approved if a majority of the votes are in favor unless other provisions are made by the articles of incorporation or bylaws.

Many nonprofit organizations are created on a directorship basis. In this case, notice of the meeting to vote on dissolution must be given to the board at least ten days ahead of the meeting. The dissolution is approved if a majority of the directors who are then in office vote in agreement.

Attorney General – Dissolution Questionnaire

Once the dissolution is approved by the members, shareholders and/or the board, the organization must submit a Dissolution Questionnaire to the Michigan Department of Attorney General. The Dissolution Questionnaire identifies the corporation, identifies a contact person at the corporation, names the person who will retain the books and records, and verifies the IRS exempt status.

If the organization has no assets and has already wound up its affairs, then you must provide the following:

  1. Copies of Form 990 or 990-EZ for the last three periods (or internal financial statements or treasurer’s reports if Form 990 or 990-EZ were not filed)
  2. A financial accounting for subsequent periods if the last 990 or 990-EZ does not have zero assets
  3. The last three years of audited financial statements, if prepared.

If the organization has assets (other than a minor amount for final expenses), you must provide the date you expect to wind up affairs, a current listing of assets and liabilities, and the plan to dispose of the remaining assets. The Attorney General will not approve the dissolution until a final accounting has been provided. Like many nonprofit corporation documents, the Dissolution Questionnaire is public record and may be accessed by any interested person.

Winding up Affairs

The organization may have outstanding receivables and payables when dissolution is approved. You are allowed to continue in existence until assets are collected, debts and other liabilities are paid, assets are sold or transferred, and any other actions are performed that are required to complete the liquidation. The process may include notifying existing claimants and publishing a notice of dissolution. Specific guidelines exist related to these notices, and you should seek additional direction if you wish to provide the notices.

To qualify for 501(c)(3) exempt status with the IRS, your organization was required to have a dissolution clause in its articles of incorporation. This clause dictates that upon dissolution, the assets must be distributed for one or more exempt purposes and may even name one or more recipients. Though your organization is no longer going to pursue its mission, the remaining assets will be able to further pursue the organization’s purpose when they are transferred to another like 501(c)(3).

Department of Licensing and Regulatory Affairs

Once the dissolution is approved by the Attorney General, the organization can file a Certificate of Dissolution with the Michigan Department of Licensing and Regulatory Affairs. This form identifies the organization and how the dissolution was proposed and approved. It must be accompanied by the letter from the Attorney General and remittance of a nonrefundable fee.

Michigan Department of Treasury

If your organization was registered for Michigan taxes, within 60 days after submitting the Certificate of Dissolution the organization must request tax clearance from the Michigan Department of Treasury. Clearance is requested by writing a letter and submitting it to the Michigan Department of Treasury, Tax Clearance Division, Lansing, MI 48922.

Notify the IRS

So far, we have discussed only the steps needed to dissolve at the state level. To dissolve at the federal level, the organization must file a final Form 990 or 990-EZ by the fifteenth day of the fifth month after the termination date, which may require a short-year return.

If you file Form 990, you must check the box Final Return/Terminated; answer Yes to Part IV, Line 31 “Did the organization liquidate, terminate, or dissolve and cease operations?” and answer Yes to Part IV, Line 32, if applicable “Did the organization sell, exchange, dispose of, or transfer more than 25% of its net assets?”

If you file Form 990-EZ, then you must check the box Final Return/Terminated in the header; answer Yes to Part V, Line 36 “Did the organization undergo a liquidation, dissolution, termination, or significant disposition of net assets during the year?”

In both cases, Schedule N, Liquidation, Termination, Dissolution or Significant Disposition of Assets, must be included with the return. With this schedule, you’ll describe the assets, fees, date of distribution, fair market value of assets, and information about the recipients. When you file the return, you’ll also include the Certificate of Dissolution, minutes of the meeting where the dissolution vote was taken, a list of the last directors, trustees or officers, and a signed statement describing the final distribution of assets.

Other Considerations

If your organization has employees, you must also file final employment tax returns at the federal and state level. Also, you must notify the Registration Section of the Michigan Department of Treasury by completing Form 163 Notice of Change or Discontinuance. This can be filed by paper or online through Michigan Treasury Online.

The process described above may not include all the steps that your organization must take to dissolve. Your organization may need to seek additional guidance from your attorney or CPA. It’s essential to be familiar with your organizing and governing documents, which will help you determine the necessary steps to ensure the organization is correctly terminated and dissolved. For additional information, visit:

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