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Should our 501c3 dissolve?

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Should our 501c3 dissolve?

Our Coalition of Neighborhood Councils (CNC) has been around for almost 12 years, but for the past few years it has been mismanaged. In closing down the building we were renting, we seem to have incurred some unforeseen debt (between $500 and $10,000 with only $500 in our account) and the current board believes the only solution is dissolution. Several directors are worried that our debt to the IRS and others could hurt us in the future if we continue as CNC. An attorney said it could cost up to $10,000 to dissolve, and some directors are looking for less expensive services. I believe that we can resolve the indebtedness and continue to provide a scaled-down program to serve the community without dissolving the CNC, but others are afraid of being sued and want to dissolve. What do you suggest?

The thing that most concerns me about your question is the mention of a debt to the IRS.  If that debt is for failure to pay over withholding taxes for employees, dissolution will not help.  It will only transfer the entity liability to personal liability for those officers or directors who were “responsible” for the failure to withhold.  The IRS will not let you off the hook for this and you ought to be working now to agree upon a payment plan.

I would not focus first on the debt.  I would ask whether you do or could provide services that your neighborhood council constituents do or would find valuable.  To put it another way, if you were to dissolve, would another entity be formed to provide the services that you would or could provide?  If your answer “yes” to either of these questions, there doesn’t seem to be much reason in your case to spend the time and money to dissolve one entity and then form another.  

You are not dealing with a huge amount of money.  You should be aware that no creditor can force a nonprofit entity into federal bankruptcy, but even if one could (or could use a state court bankruptcy proceeding), you are not dealing with enough money to make it worthwhile.  Other than the IRS (which is normally happy to work out a payment plan for withholding taxes or other penalties), your creditors are likely to accept a negotiated settlement with a reduced payment because, as a practical matter, they don’t have a good alternative.  You may have to pay more if you are continuing than you would if you simply told them there was nothing available to pay them upon dissolution, but the total cost could be less than the cost of dissolution.    If you decide to continue, you will want to get your liabilities resolved and keep as much good will as possible before you start raising money to do new things.

If you do dissolve under state law, you are probably going to have to deal with your creditors in some way in order to complete the legal requirements of dissolution.  Your alternative to formal dissolution is to allow the corporation to go fallow and do nothing until you lose your corporate charter and/or all statutes of limitations on the obligations have run out.  But that is not a very satisfactory ending.  It isn’t always clear when it is over, and directors may have responsibilities until it is. Finality, such as that obtained in a formal dissolution, is very attractive to those who are afraid of litigation.

Tuesday, July 30, 2013

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