Can we dissolve a not-for-profit while giving away or selling assets to a private individual?
July 20, 2012 12:14 PM Subscribe
Asking on behalf of a friend. How can one dissolve a not-for-profit that isn't working, but still allow for the website the organization runs to continue?
From Friend:
The organization is incorporated as a not-for-profit in illinois. Everyone involved pretty much agrees it was a good idea, and is still a good idea, but internal fracturing and fighting is ruining the ability to get things done. So they would like it to continue, but not under the current structure. One active member has offered to take over curating it, and while pretty much everyone is on board (so far) with this happening, they're worried it isn't legal to give it away in that fashion.
From Friend:
I am a member of a not-for-profit organization. Due to politics, among other things, it has been decided that it is best to close the organization. The organization has very little assets, only about $1,500 in cash, and a web site that was designed for communication and educational purposes only. There are no sponsors or affiliates associated with the web site, and it does not bring in any income. However, it costs about $800 a year to maintain due to the cost of domains and server expenses.Additional notes from me:
The question I have is this, can the Board of Directors, along with a majority vote from the members of the organization, choose to give the message board away to a single person in order to have that person continue to maintain the web site, after the organization has been dissolved? Or, is it necessary that the web site be given to another not-for-profit organization? If the answer is yes, that the website can be given to an individual, the next question is, can the domains be purchase from the individual, as part of the web site? And since the organization has paid for a year in advance for the server, can that account be signed over to this individual as well or would that be considered an asset and should be turned over to the state when the corporation is dissolved?
The individual in question is not a member of the Board of Directors or an Officer of the organization, but has been involved in helping run the site as a moderator.
The organization is incorporated as a not-for-profit in illinois. Everyone involved pretty much agrees it was a good idea, and is still a good idea, but internal fracturing and fighting is ruining the ability to get things done. So they would like it to continue, but not under the current structure. One active member has offered to take over curating it, and while pretty much everyone is on board (so far) with this happening, they're worried it isn't legal to give it away in that fashion.
Response by poster: I don't know all the details, but the site is fairly high traffic, so I am going to guess its not on shared hosting.
posted by [insert clever name here] at 4:35 PM on July 20, 2012
posted by [insert clever name here] at 4:35 PM on July 20, 2012
I think the board is right to be concerned. Disposing of the assets of a defunct nonprofit can be tricky because those assets were not taxed when they were generated. Depending on how they view the value of your website, both the board and the individual website maintainer may find themselves in discussions with the IRS.
It's worth getting some real legal advice around dissolving this organization. As far as the website is concerned, though, you should consider exploring whether another nonprofit with a mission that accommodates the website's purpose will accept ownership of it and the volunteer services of your individual maintainer. That way it stays in nonprofit hands and nobody has to worry about improperly disposed or ill-gotten assets.
(Dreamhost hosts nonprofits' websites for free and registers domains for $10/year. You can make this website a more attractive proposition by moving it from your expensive current host!)
posted by FLAG (BASTARD WATER.) (Acorus Adulterinus.) at 4:42 PM on July 20, 2012
It's worth getting some real legal advice around dissolving this organization. As far as the website is concerned, though, you should consider exploring whether another nonprofit with a mission that accommodates the website's purpose will accept ownership of it and the volunteer services of your individual maintainer. That way it stays in nonprofit hands and nobody has to worry about improperly disposed or ill-gotten assets.
(Dreamhost hosts nonprofits' websites for free and registers domains for $10/year. You can make this website a more attractive proposition by moving it from your expensive current host!)
posted by FLAG (BASTARD WATER.) (Acorus Adulterinus.) at 4:42 PM on July 20, 2012
The IRS has some guidelines that non-profit articles of incorporation must meet to get 501 status. Often states have even firmer guidelines, and those guidelines include language about how to dispose of the company's assets upon dissolution. Certain language must be included in the articles of incorporation - your friend might already have guidelines for this written down on some paper he hasn't looked at since he incorporated.
When you dissolve a non-profit, the assets must be distributed in a way that aligns with the mission of the organization. For example, I run a non-profit art school - if we were to dissolve, all of our assets, physical and intellectual, would need to end up being used / given to other organizations that would use them according to our mission. For example - we couldn't take home the easels we made for the school - they would have to be donated to another organization, sold (after which the proceeds from the sale would go towards the mission), or given away, to some deserving student that demonstrated need. Our web domain and site would either be wound up and turned off, or we would sell/transfer the site, domain, and other rights that come with the site the same way we would dispose of physical assets.
If your friend's website will continue to serve the same function it would under the non-profit, I don't see a problem transferring the site, domain, and related intellectual property, as long as the transfer document stipulates that the new steward must use the site for the same purpose as it was being used under the non-profit.
Since your friend's organization wants the site to continue running and fulfilling its original purpose, and the current steward of the site wants to continue running it, then rules about dissolving a non-profit actually encourage that to happen. The feds and state allowed the org to not pay taxes in order to provide a benefit to the public; the feds and state already missed out on the taxes - they want their money's worth by those untaxed assets being used for the public good.
Just have them document the intent behind the transfer, the new owner's former and future function regarding the site, etc., and they'll be golden.
posted by amcm at 8:10 PM on July 20, 2012
When you dissolve a non-profit, the assets must be distributed in a way that aligns with the mission of the organization. For example, I run a non-profit art school - if we were to dissolve, all of our assets, physical and intellectual, would need to end up being used / given to other organizations that would use them according to our mission. For example - we couldn't take home the easels we made for the school - they would have to be donated to another organization, sold (after which the proceeds from the sale would go towards the mission), or given away, to some deserving student that demonstrated need. Our web domain and site would either be wound up and turned off, or we would sell/transfer the site, domain, and other rights that come with the site the same way we would dispose of physical assets.
If your friend's website will continue to serve the same function it would under the non-profit, I don't see a problem transferring the site, domain, and related intellectual property, as long as the transfer document stipulates that the new steward must use the site for the same purpose as it was being used under the non-profit.
Since your friend's organization wants the site to continue running and fulfilling its original purpose, and the current steward of the site wants to continue running it, then rules about dissolving a non-profit actually encourage that to happen. The feds and state allowed the org to not pay taxes in order to provide a benefit to the public; the feds and state already missed out on the taxes - they want their money's worth by those untaxed assets being used for the public good.
Just have them document the intent behind the transfer, the new owner's former and future function regarding the site, etc., and they'll be golden.
posted by amcm at 8:10 PM on July 20, 2012
Response by poster: Does it matter that this is a not-for-profit, not a non-profit? I don't know the difference myself, but I know that they were not able to file for 501(c)3 status. They haven't paid taxes because they've never brought in enough money to do so, but they would have to pay taxes if they did.
posted by [insert clever name here] at 6:28 AM on July 22, 2012
posted by [insert clever name here] at 6:28 AM on July 22, 2012
Generally, a nonprofit organization has received 401(c) status; a not-for-profit is a less formal association like a club or a group of hobbyists without significant income for which income tax status is not relevant. As amcm notes, this varies by jurisdiction, and in the real world most people treat the two terms as synonyms.
An asset transfer from a not-for-profit to an individual is still a risk because it can trigger an audit (of the not-for profit board and/or the individual asset recipient) that would, at least in part, be about evaluating whether it was legitimate for the organization to operate as a not-for-profit given the nature of its income and the assets it developed.
As amcm and I have suggested above, the safe thing is to get the asset into the hands of a mission-aligned nonprofit. Any decision to transfer an asset of uncertain value to an individual or for-profit entity with income tax liabilities is asking for trouble unless both parties have real, competent legal counsel advising them that there's no problem. If your organization is simply and honestly motivated to extend the life of a website that is of some value to the communities it has been serviing, it should transfer it to a kindred nonprofit willing to work with your interested individual and not to the individual herself.
posted by FLAG (BASTARD WATER.) (Acorus Adulterinus.) at 12:19 PM on July 22, 2012
An asset transfer from a not-for-profit to an individual is still a risk because it can trigger an audit (of the not-for profit board and/or the individual asset recipient) that would, at least in part, be about evaluating whether it was legitimate for the organization to operate as a not-for-profit given the nature of its income and the assets it developed.
As amcm and I have suggested above, the safe thing is to get the asset into the hands of a mission-aligned nonprofit. Any decision to transfer an asset of uncertain value to an individual or for-profit entity with income tax liabilities is asking for trouble unless both parties have real, competent legal counsel advising them that there's no problem. If your organization is simply and honestly motivated to extend the life of a website that is of some value to the communities it has been serviing, it should transfer it to a kindred nonprofit willing to work with your interested individual and not to the individual herself.
posted by FLAG (BASTARD WATER.) (Acorus Adulterinus.) at 12:19 PM on July 22, 2012
Response by poster: Would an audit be a bad thing? They've never brought in much money, and the money that has been brought in has gone to paying upkeep. Aside from being a PITA. My understanding is that everything has been run above board. They never paid taxes because they never brought in enough money to require taxes be paid, not because they were dodging anything.
Conversely, could they just sell the domain as part of dissolving the not-for-profit, and donate that money (and any other assets they have) to a charity?
posted by [insert clever name here] at 3:17 PM on July 23, 2012
Conversely, could they just sell the domain as part of dissolving the not-for-profit, and donate that money (and any other assets they have) to a charity?
posted by [insert clever name here] at 3:17 PM on July 23, 2012
Response by poster: If there is anyone still reading this, what type of lawyer would one look for to help assist in this matter?
posted by [insert clever name here] at 8:47 PM on July 23, 2012
posted by [insert clever name here] at 8:47 PM on July 23, 2012
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posted by jrockway at 2:32 PM on July 20, 2012 [2 favorites]