What can an NPO do with its money?

October 18, 2008 6:44 AM

What happens to a non-profit's cash on hand if they dissolve?

A friend has a family member with a non-profit organization, that's been incorporated as such for many years. Years ago, a wealthy individual donated $100,000 to the non-profit. The NPO hasn't touched the money, doesn't do anything day-to-day and the money sits in a money market account.

It's years later. The original donor has no interest in getting the money back. What are appropriate uses of the money? Do they need to follow a charter set forth by the NPO? (This doesn't seem enforceable to me.)

Further, if the NPO were to effectively dissolve, what would happen with the money? Could it be distributed back to the members? (Seems unlikely.)

Finally, if nothing else, could a scholarship be formed to help pay for the schooling of my friend with the money?

The money can't be entirely untouchable, right? This person was the sole donor to the organization (or one of very, very few) and the organization isn't in any way active.

I'm just wondering if the money is an island or what would happen at dissolution of the NPO.

posted by anonymous to law & government (9 comments total)

The rules are likely to vary state-by-state, depending on where the nonprofit was incorporated. To avoid potential and very unpleasant tax and other repercussions for whoever is the nominal (if inactive) leader of the nonprofit (like the last President of its Board of Trustees or CEO), someone with authority is going to have to talk to a lawyer.

This is too complicated to do without good legal advice, and any costs can be paid out of the nonprofit's assets.

In Maryland, I'd contact MANO for recommendations on a good lawyer specializing in nonprofit law. Your state might have an analogous group.
posted by baltimoretim at 7:02 AM on October 18, 2008

In general, and YMWV depending on what state you are in, first any claims/debts of the non-profit must be paid. Then, any remaining assets must generally be transferred to another non-profit. Check for your state's version of the Not For Profit Corporations Act or, most recently, the "Revised Non-Profit Corporations Act." An example is available here.

baltimoretim is absolutely right: "This is too complicated to do without good legal advice, and any costs can be paid out of the nonprofit's assets."
posted by webhund at 7:15 AM on October 18, 2008

I believe that the charter of the NPO would probably dictate where the money could be spent. If the mission of the NPO was related to educating people like your friend, _maybe_, but there might have to be a board in place (the composition of which might be spelled out in the charter), and the board would have to approve this expenditure of the money.

I think that the point of setting up a non-profit is that the public is willing to forgo taxes on those donations if it has some assurance that the funds will support programs in the public interest - which will be decided by a relatively disinterested _group_ of people, rather than one person who'd like to see his niece/nephew/grandson/whatever go to a good college.

This is based on my vague knowledge from being on two boards. You should at least read the charter and/or a small book about non-profits in your state to start; if you find nothing there telling you you can't do what you want, then it would be a good idea, yes, to see a lawyer.
posted by amtho at 7:15 AM on October 18, 2008

Agreeing with the see a lawyer crowd. There may have been restrictions put on the gift in the first place as well, which could make things even more complicated and require a trip to the Attorney General for a Cy Pres action. There is also state law that controls.

Most likely the money will end up being given to a different NPO with a similar purpose/mission as the one dissolving. If you could mention the state you're in, people might be able to make a better guess, but it's really impossible to say without knowing the original terms of the gift. Go see a lawyer that specializes in NPOs.
IANAL/IANYL
posted by Arbac at 8:41 AM on October 18, 2008

"...that's been incorporated as such for many years"

I think that's the key part of your question. Depending on your state I would guess, though it's pretty standard, a non-profit corporation is setup as a perpetual corporation. In other words, it exists until the board legally dissolves it. It doesn't matter if the group hasn't been active or even if it has never done anything. However, receiving the $100,000.00 contribution was an act of the corporation and would need to be resolved by the duly elected board before (or as a part of) its dissolution. Unless there were specifications attached to the gift, the board, generally, has the authority to do what they wish with the gift. Morals and ethics, as much as legal authority, come into play. Again, some states are different, but that's the standard way this is handled.

I would also stress, that attempting to do something with the money outside of the authority of the still existing corporation, would be embezzlement.
posted by Gerard Sorme at 9:44 AM on October 18, 2008

There are at least three aspects to this. First, the tax-free status is essentially governed by the FEDERAL tax code. To avoid any penalty for the officers and retroactive denial of deductions for donors (and yes, this falls under tax fraud law), the monies have to be distributed in such a way that the non-profit status is maintained, even if the organization merges or dissolves.

Second, the group is incorporated under STATE law. This will involve some variation and certain types of purposes could be written into law. Dissolution will also have to follow the state's particular rules.

Third, as an institution, the non-profit has a charter. The board has some authority to change this but has to be very careful if and when it does so. Following the charter is best.

My dad was involved with a non-profit for many years that had an institution character on the one hand and a real-estate character on the other. The board came to feel that these purposes were better served by separately incorporated non-profits. Unfortunately, in the process, they appeared to have violated state law. Essentially the institution transferred the real-estate assets to a group that did not conform with its own purpose. Even though both boards were in some consensus on how to pursue the joint mission, a contentious minority on both was incensed and involved the state attorney general.

The institution survived after merging both groups back under the same wing, sort of wiping the slate clean and pretending the division of assets had never occurred in the first place, but many bruised feelings persisted, and some loss of direction occurred afterward.

Did I Nth that you need a lawyer? Even if everyone involved thinks they're on the same page.
posted by dhartung at 1:25 PM on October 18, 2008

You can't do this without a lawyer; no matter what happens, you'll need to go to the Secretary of State's office in your state and file documents anyway, and the laws governing your charter vary by state anyway. So just get a lawyer from your state retained on the project and they'll tell you your options.

Under federal law, you've got to spend any remaining money to do something that furthers the original mission of the charity. You could end up deciding to give the money to a similar nonprofit, you could pay it out in grants, you could merge your organization with another one. There are a few ways to dissolve.

BoardSource has an article on this topic, and they are very helpful and reputable so it might be worthwhile to become a member and read it.
posted by Miko at 2:45 PM on October 18, 2008

Generally, the assets of a 501c3 not-for-profit organization cannot be used to benefit a single individual, especially if the use that individual puts it to has nothing to do with the mission (you don't say what the organization is, nor is it clear that this is a 501c3?). You need (dare I say it) a lawyer, but also try contacting these people. Even if you're not an arts organization, they will know the law, or where to find it, or where to direct you to find it.
posted by nax at 3:57 PM on October 18, 2008

I'm the director of an NPO in Michigan. In Michigan, if my NPO were to dissolve, any cash remaining after all the bills were paid must be distributed to another (or mulitple) NPO(s).
posted by HuronBob at 7:32 PM on October 18, 2008