Closing Down the Right Way

In the last Board Cafe column, we discussed how to think about the possibility of closing down a nonprofit, including alternatives to closure. But sometimes closure is the best choice of the possible options. In recent weeks we've had a chance to see some Wall Street firms demonstrate the wrong way to close: suddenly leaving customers, investors, and employees in the lurch. Here we discuss how to close down in a way that protects constituents as much as possible, and honors the organization's achievements.

When nonprofit boards have to shut down ("dissolve") the organization, they often find themselves swimming in a sea of unpaid bills, demanding creditors, frustrated and anxious staff, and desperate clients. Going broke -- like other things in life -- can be done poorly or well. Managing insolvency well can mean that client or patron services are not disrupted, that staff are given assistance in their job transitions, or that creditors can receive some satisfaction. Here are some steps for boards considering dissolution:

  • Identify your legal and contractual obligations. Consult a lawyer to help you plan and implement the dissolution (there may be one willing to help on a free -- pro bono -- basis). Are there government contracts that must be fulfilled? Are there building or equipment leases in place? Do you have any restricted money or assets which must be returned to a funder rather than liquidated to pay creditors? Are there any pending lawsuits? In particular, are there any unpaid taxes, such as payroll or sales taxes, which may pose personal liability for board members or staff? Notify and negotiate any outstanding contracts, payment or restricted fund obligations. You may not leave everyone happy, but at least you will leave with a reputation for doing the best you can to meet obligations.
  • Be frank and direct with the staff about the organization's future and enlist their help in the closure. If you have planned ahead, you should be able to pay staff through the close-down.
  • Identify clients who will be hurt by the closure and explore ways to minimize the disruption to them. For example, there may be nearby childcare centers that can take a few additional children, or a local cancer society may be able to help families living with cancer. There may also be a community foundation or other donor who could donate funds to ensure that client transitions, if necessary, are as smooth as possible.
  • Review the organization's own rules for dissolution as stated in the Bylaws and Articles of Incorporation. For example, some Bylaws may require a 2/3 vote of the board, or a vote of the membership, for dissolution. Take care to hold the appropriate meetings and votes, and to record the actions taken. Choose one person who will store the documents for a few years in case there are questions. Certain nonprofits, such as those in the health or counseling fields, may have a legal obligation to maintain client records; if you are in this situation, determine another organization to take on this responsibility for you.
  • State laws vary on the steps required for nonprofit dissolution. In some cases a petition must be filed with a court which then appoints a trustee to oversee the distribution of any remaining assets. Ask an attorney for help, or contact your state Attorney General for information. If the nonprofit has significant assets (such as real estate) it may be necessary to go through a formal bankruptcy process.
  • If you are able to pay off all debts, make a list of any remaining assets and decide on other nonprofits to receive them: government regulations require that nonprofit assets be given to another nonprofit, not, for example, distributed among board or staff. In addition to cash or receivables, assets may include copyrights, historical photos, and the organization's name and internet domain name. As examples, a nonprofit may donate its equipment to a nonprofit halfway house, give its publications inventory to a nonprofit bookstore, and its domain name to a sister organization.
  • Be proactive about publicity. If an established charity has failed, journalists may be looking for a scandal story. Write up some key points about the organization's successes, its reasons for closing, and the steps taken on behalf of clients. Choose one or two people who will speak for the organization to the press.

If you can, find a way to celebrate the organization's successes and legacy. Staff and board might invite former staff, board, and volunteers to a closing dinner at someone's home. An open letter to the public might be sent to a local newspaper. A community has been created around the nonprofit, and it is appropriate and fitting for that community to draw together to mark its transition.

Thanks very much to attorney and Board Cafe Editorial Committee member Michael Schley of Santa Barbara, California, for his pro bono assistance on this article.

See also previous Board Cafe and Blue Avocado articles:

Comments (5)

  • What a joy to read this article! I felt affirmed in the guidance I gave to a recent client facing the difficult decision to dissolve. My research into "how to" determine whether to dissolve, and how to take the terror out of the process resulted in little more than dry, legal stuff. The result was similar when I turned to large, well known nonprofit organizations and consultants for words of wisdom. In the end, I went with the common sense, humanistic approach contained in your article. Thanks a bunch.
    Terry Berg, Terry Berg Solutions, Inc., Edgewater, Maryland

    Jan 13, 2009
  • Thanks, Terry . . . it's great to hear that organizations are getting the right help from folks like you when they need it most . . . thanks for taking the time to write! Jan

    Jan 13, 2009
  • Because nonprofit organizations are operated for the public benefit and many members involved in the dissolving organization will continue to work in the nonprofit sector, an organization facing dissolution should consider additional aspects such as:
    * Being honest with major funders who may in turn, help with transitional funding.
    Transferring any strong and valuable programs to another organization through some form of strategic restructuring.
    * Notifying and negotiating all outstanding contract obligations in order to leave the reputation of the staff and board intact and the organization’s good name unsullied.
    * Determining what level of service can be maintained.
    * Identifying clients most at risk due to the loss of service and taking steps to minimize it such as identifying other service providers to which such clients can be transferred in a smooth transition.
    * Negotiating less than full payments with creditors. Some may be willing write off the debt as a donation.

    Oct 19, 2009
  • Anonymous

    Here are some things we learned from our "Conscious Closure" of our non-profit, ascent magazine.... after 10 years of award-winning publishing we discerned that "to be sustainable" meant bringing our work to a close, letting it come to an end to seed new beginnings from a place of real rest and closure....

    Right Questions Lead to Right Actions
    We began by asking “how do we want to do this, how do we want to be in this, what do we want to create from this?” From this, we framed our Conscious Closure work in two ways 1) as an organization-wide project in which everyone is involved and essential and 2) as a collective learning process and unique opportunity to learn and practice a specific kind of work.
    Practices to create an organization-wide culture around your "Conscious Closure":
    * Form a core transition team to hold the overall process and connect the parts of the work, and the organization into a whole;
    * Hold frequent and intentional check ins for reflection and connection and to surface and include multiple voices;
    * Pay attention to our inner landscape (emotions, mindsets, feelings, competencies, blockages) in order to align with our outer actions and decision-making process;
    * Use practices such as conversation, meditation, reflection, cooking together, to access different kinds of perspectives and intelligence and to enhance group cohesion and mutual support.
    The Big Learning for the Sector
    * Make conscious the need to foresee and steward endings in organizations.
    * Learning to listen to what the work is asking rather imposing on it what we want or expect.
    * Name and framing and ending can catalyze an immense amount of energy, dynamism and focus. It can literally give new life.
    * Shift the attention of leadership towards the practices of “collective stewardship”: the inspiration to lead in different ways, develop skills and open up ways of thinking in order to steward transitions and endings.
    * The importance of understanding how systems learn; creating conditions and skills in organizations to work with and not to resist or hide from the natural processes of lifecycles.
    * Cultivate the patience and ability to hold the paradoxes of celebration and grieving.
    * And lastly, lastly - Be courageous!
    for more see:

    Feb 10, 2010
  • Hi Jan,
    Thanks for the insights into this sad subject! They helped me a lot (to settle my mind, at least).

    Annien from @ prince herself

    Nov 12, 2010

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