How to Close a Nonprofit, and How Few Charities Do It Properly

To close a nonprofit, the board votes to dissolve and adopts a plan of dissolution, the organization pays or settles what it owes, and everything left goes to another 501(c)(3) or a government body, as the dissolution clause in its articles requires. It then files articles of dissolution with the state, notifies the attorney general where the state requires it, and files a final Form 990, 990-EZ or 990-N marked as terminated. Most of the time goes on the middle part: settling debts and handing over the assets.

Very few charities do this. Across 256,539 charities filing a full Form 990, 108 answered Yes to the question asking whether the organization terminated and ceased operations: 0.042%, or 1 in 2,375. Charities stop operating in far larger numbers than that. Most of them simply stop filing, and the IRS revokes their exemption three years later. The figures below are from the IRS annual extract of those returns, and the analysis script is published with the method.

Before deciding to close

Dissolution is permanent and the assets cannot come back, so it is worth ruling out the alternatives first. Three are common, and each keeps the work going in some form.

• Merge with another charity. The programs, staff and donors move to an organization that can sustain them, and the smaller one dissolves into it or becomes a subsidiary. It takes longer than a dissolution and usually needs a lawyer, but it is the only option that keeps the mission intact.
• Transfer the programs and dissolve. A simpler version: a larger charity takes on one program, often with its staff, and the organization then dissolves with its remaining assets going to that charity. Fiscal sponsorship works in the other direction too, as a home for a program that does not justify its own corporation.
• Go dormant. An organization that has stopped operating but may restart can stay in existence, filing its state annual report and a Form 990-N each year while its gross receipts stay normally $50,000 or less. It costs little, but somebody has to keep doing it. Stopping the filings is not dormancy; it is the route to revocation described below.

The decision to dissolve belongs to the board, and in an organization with voting members, to the members as well. Check the bylaws for the vote required, which is often higher than a simple majority. The bylaws template sets out typical wording, and the board guide covers what only the board can decide.

The steps, in order

1. Board resolution to dissolve, passed at a properly called meeting with a quorum and minuted, followed by a member vote if the bylaws or state law require one.
2. Plan of dissolution, adopted by the same vote, setting out how liabilities will be paid and which organizations will receive the remaining assets.
3. Notice to the attorney general, where the state requires it. Some states review the plan before the corporation can dissolve. California and New York are the strictest, described below.
4. Settle liabilities. Pay creditors, end or assign leases and contracts, and give notice to known creditors in the way state law sets out, which in some states limits claims made afterwards.
5. Deal with restricted gifts according to their restrictions, which may mean returning them, transferring them to a charity that will honour the purpose, or asking the attorney general or a court to change the purpose.
6. Distribute what is left to one or more 501(c)(3) organizations or a government body, as the dissolution clause requires, with written records of what went where and at what value.
7. File articles or a certificate of dissolution with the secretary of state, and close any charitable solicitation registrations in each state where you are registered.
8. File the final federal return, with the final return box checked and Schedule N attached, by the 15th day of the fifth month after the date the organization terminated.
9. Close everything else: final payroll returns, state tax accounts, bank accounts, the website and domain, and arrangements for keeping the records.

The order of the last steps varies by state. Some want the certificate of dissolution filed before the assets are distributed and some after, and some ask for a tax clearance from the state revenue department first. The secretary of state’s own dissolution page is the authority for the order in your state.

Where the assets can go, and where they cannot

A 501(c)(3) could not have been recognised without a dissolution clause in its articles, committing its assets on winding up to another exempt organization or to a government body for a public purpose. That clause decides where everything goes. How to start a nonprofit explains why the IRS insists on it at formation.

Three rules follow from it. Nothing goes to the people involved. Directors, officers, founders and staff cannot receive the assets, however much of their own money went in, although employees can be paid wages and reasonable severance they have earned. Assets can be sold, at a fair price and to anyone, and the proceeds are then distributed like any other asset. And gifts given for a purpose keep that purpose. A fund raised for scholarships should go to an organization that will award scholarships. Where that is not possible, the state attorney general, and in some cases a court, can approve a different use.

Choose recipients that fit the mission, and ask them before naming them in the plan. A charity is not obliged to accept a transfer, and one that inherits restricted funds also inherits the duty to spend them as the donors intended. The net assets page explains how restricted and unrestricted balances are shown, which is the split the plan has to follow.

What the plan of dissolution contains

There is no federal form for it, and a short plan is usually enough for a small organization. A workable plan covers:

• The decision to dissolve and the date of the vote, with the number of directors, and members if any, who voted for it.
• A list of assets, with estimated values, and of known liabilities.
• How each liability will be paid or settled, and who is authorised to do it.
• Any gifts held with donor restrictions, and how each will be handled.
• The named recipient of the remaining assets, or a way of choosing one, with confirmation that each is a 501(c)(3) or a government body.
• Who will file the state and federal returns, and by when.
• Who will keep the records, where, and for how long.

The same documents go to the IRS. Schedule N asks for a certified copy of the articles of dissolution, the resolutions and the plan, and a 501(c)(3) must also attach a statement signed by an officer describing the final distribution of assets. Writing the plan with that in mind saves reconstructing it later.

The attorney general, and the two strictest states

Charity assets are held for the public, and state attorneys general are the officials who protect them. Their involvement in a dissolution varies from nothing at all to formal approval of the plan.

In California, a public benefit corporation must obtain from the Attorney General either a written waiver of objections to the distribution of its assets, or written confirmation that it has no assets, before it can dissolve. The Attorney General’s dissolution page sets out the package, and the office states a normal turnaround of about one month for a complete one. New York goes further. A charitable corporation’s plan of dissolution needs the Attorney General’s approval, sought by a verified petition, and the corporation files a final CHAR500 with the Charities Bureau; the Charities Bureau’s guidance covers the procedure for corporations with assets.

Other states range between those and no involvement at all. Where a state requires only notice, give it early, because an attorney general who hears about a dissolution after the assets have moved has reason to ask why.

The IRS side: the final return

There is no separate federal application to end exempt status. The final annual return does it. On Form 990 or 990-EZ, the organization checks the final return box in the heading, answers Yes to the question on liquidation, termination or dissolution, and attaches Schedule N, which describes each asset distributed, its fair market value, the date and the recipient, and asks whether any officer or director is involved with the organization that received it. An organization that files the 990-N answers Yes to the question asking whether it has terminated.

The deadline is set by the date of termination, not by the usual year end. An organization that terminates in August has a final tax period ending in August, and its return is due by the 15th day of the fifth month after that. The Form 990 guide covers which version applies and what the full return asks.

The EIN is permanent and is never reissued to anyone else, so there is nothing to cancel: the final return is what tells the IRS the organization has ended. The EIN page covers what it is used for while the organization exists.

What the final returns actually show

The 108 charities that filed as terminated on a full Form 990 are not the ones most people picture closing. Their median spending in the final year was $382,932, and 62.0% had employees or payroll. Closing properly is something organizations with staff and a treasurer tend to do. The typical small charity that stops operating does not file a final return at all.

The final year looks like a wind-down. 75.9% spent more than they took in, against 41% of all charities in an ordinary year on the deficits page, and 39.8% spent more than twice their revenue, which is what paying off liabilities and handing over the reserves looks like on a single return. 27.8% reported grants to other organizations, at a median of $179,012, and for 15.7% of all final returns those grants were more than half of the year’s spending: the distribution of assets, visible in the expense lines.

Most end at zero. 73.1% report no assets at all at year end, and 74.1% no net assets. That leaves 29 final returns, 26.9%, still showing assets, at a median of $327,491, and 18 of them with $100,000 or more. 19 still report liabilities, and 8 report negative net assets, meaning they closed owing more than they owned.

Not every Yes is a closure, and that is the obvious objection to testing these figures. The largest final return, reporting $26.0 billion of assets, is a group return filed for a hospital system’s affiliates. The system still operates: what ended was that filing arrangement, not the charities in it. Reorganizations like that account for some of the returns still showing assets. The rest are organizations that described their return as final while the balance sheet still held something, which Schedule N exists to explain and which an attorney general would ask about.

Selling most of the assets without closing

The same schedule has a second part, for an organization that sells, exchanges, disposes of or transfers more than 25% of its net assets in a year and carries on. It covers mergers into a larger organization, the sale of a building or a hospital, and the transfer of a program with its funds. 615 charities (0.24%) answered Yes to that question, nearly six times as many as filed as terminated, and only 15 answered Yes to both.

Unlike termination, the rate climbs steadily with size, from 0.17% under $250,000 to 0.56% over $25m, because large organizations restructure and small ones close. Only 8.9% of them ended the year with no assets, against 73.1% of the final returns, which is the difference between a transaction and a winding up. A board considering a merger rather than a dissolution should expect to report it here.

What happens if you just stop

The route most charities take is to stop: no more programs, no more filings, a bank account left with a small balance. Federal law settles what happens next. An organization that fails to file a required annual return or notice for three consecutive years loses its exemption automatically, by operation of law, with no appeal. The first list published under that rule, in June 2011, named about 275,000 organizations, and the IRS said it believed most were already defunct. The revoked are listed publicly and are searchable in the IRS Tax Exempt Organization Search.

Stopping leaves the real problems in place. The corporation still exists under state law until the state dissolves it, often administratively for missing annual reports. Any assets left are still charitable assets, and the directors are still the people responsible for them. Once the revocation is published, donations to it are no longer deductible for the donor. And if the organization wants to restart, it has to apply for exemption again. For a charity with nothing left, a proper closure is a short set of filings. For one with assets, it is the only route that ends the directors’ responsibility cleanly.

Employees, contracts and records

Employees need final wages under state law, often on the last day of work, final W-2s and any accrued leave the state requires to be paid out. The last Form 941 has a box for an employer that has closed or stopped paying wages, and state unemployment and withholding accounts need closing separately. The tax filing guide covers the payroll obligations that continue until then.

Leases, loans, grant agreements and service contracts each need ending, assigning to a successor, or settling. Funders with unspent grants often require the balance returned or a report filed, so read each agreement before assuming the money can pass to the recipient named in the plan.

Insurance deserves a decision rather than a lapse. A claim against the directors can arrive after the organization has closed, and a directors and officers policy written on a claims made basis covers nothing once it ends unless an extended reporting period, often called tail cover, is bought. The D&O insurance guide explains how those policies work.

Name a custodian for the records: minutes, the plan of dissolution, the final returns, the distribution records and the employment records. A former director or the organization that received the assets is the usual choice. The final return and its schedules stay public, so the record of where the assets went is permanent either way.

Method and limits

The data is the IRS SOI annual extract for processing year 2024, restricted to 501(c)(3) organizations with at least $25,000 of total expenses, which gives 256,539 returns. Termination is Part IV line 31 and significant disposition Part IV line 32, the two questions that require Schedule N. Grants are Part IX line 1, and assets, liabilities and net assets at year end are Part X lines 16, 26 and 33. Without the spending floor, 138 full returns answered Yes to line 31.

Four limits. Organizations filing Form 990-EZ or 990-N are absent, and they are most of the charities that close. Schedule N itself is not in the extract, so the recipients and values of the distributions are not measurable here. Size bands use final year spending, which includes any distribution of assets and can make a closing organization look larger than it was. And the extract records an unanswered Yes or No question as No, so the counts are of organizations that answered Yes. Nothing here is legal advice; dissolution is governed by state law, and a lawyer is worth the cost wherever there are assets, employees or restricted funds.

Questions people ask

How do you close a nonprofit?

The board votes to dissolve and adopts a plan of dissolution, the organization settles its liabilities, and the remaining assets go to another 501(c)(3) or a government body. It then files articles of dissolution with the state, notifies the attorney general where required, and files a final Form 990 marked as terminated, with Schedule N.

How do you dissolve a 501(c)(3) with the IRS?

By filing a final Form 990, 990-EZ or 990-N. Check the final return box, answer Yes to the termination question and attach Schedule N with the articles of dissolution, the resolutions, the plan and an officer's statement of the final distribution. There is no separate application.

When is the final Form 990 due?

By the 15th day of the fifth month after the date the organization terminated. The final tax period ends on the termination date, not the usual year end, so a charity that terminates in August files by mid January.

What happens to a nonprofit's assets when it closes?

After liabilities are paid, everything left must go to one or more 501(c)(3) organizations or a government body, as the dissolution clause requires. Nothing can go to directors, officers or founders, and gifts given for a purpose must go to an organization that will honour it.

What happens if a nonprofit just stops filing?

After three consecutive years without a required return, its exemption is revoked automatically, with no appeal. The corporation still exists under state law until the state dissolves it, and any remaining assets are still charitable assets the directors are responsible for.

How many charities close properly?

Very few. Of 256,539 charities filing a full Form 990, 108 answered Yes to the termination question, 1 in 2,375. Their median spending in the final year was $382,932. Most charities that stop operating never file a final return.

Do we need the attorney general's approval to dissolve?

It depends on the state. California requires a written waiver of objections, or confirmation that there are no assets, before a public benefit corporation dissolves. New York requires approval of the plan. Many states require only notice, and some nothing.

Where do these figures come from?

The IRS Statistics of Income annual extract of Form 990 returns, processing year 2024, covering 256,539 charities with at least $25,000 of spending. It is a free public download, and the analysis script is published alongside the method.

This is reference information, not legal or tax advice. Rules vary by state and change over time. For a decision that carries real consequences, check the current text at irs.gov or your state registry, and talk to a nonprofit attorney or CPA.