Because nonprofits cannot be operated to the private benefit of an individual or organization, they can’t simply distribute their assets to just anyone when it’s time to wind up their operations. Instead they have to choose another nonprofit beneficiary to receive the assets that remain after all the nonprofit’s liabilities have been paid off. Even the process of giving away a nonprofit’s assets can be complex. Here are a few reasons why:
- Disagreement about the best beneficiary. At the windup stage, a nonprofit’s board still has a fiduciary obligation to manage the organization’s assets in a way that is consistent with the nonprofit’s mission. Typically that means giving remaining assets to another nonprofit operating within the same area. Sometimes the choice of beneficiary is clear, while in other circumstances the nonprofit’s leadership can have sharp disagreements about the best solution. This can be especially problematic if board members of the donor organization sit on boards of other nonprofits and each hopes to steer the funds to their own preferred beneficiary.
- Negotiations related to encumbered assets. A potential beneficiary may require assurances before it takes ownership of nonliquid assets that may come with legal complications of their own. Real estate is one example. So is stock or other securities that can’t easily be sold. In many cases a beneficiary will ask that assets like these simply be sold and the proceeds donated instead. Alternatively, the donor may need to make contractual promises that force it to continue as a going concern while those obligations remain in effect.
- Tax planning. The technical rules governing the distribution of a nonprofit’s assets are, ultimately, tax rules. The distribution needs to be handled in a way that preserves preferential tax treatment for the organization, the beneficiary, and the assets involved. Among other things, the nonprofit’s leadership needs to take care to avoid self-dealing transactions that could create unwanted tax liability. Distributions involving appreciated assets (stock, real estate, and so on) may also need to be examined from a tax perspective.
Winding up a nonprofit involves careful steps and planning. The Church Law Center of California serves clients in the religious and secular nonprofit worlds. We can help your organization examine the steps it must take to resolve its affairs and distribute assets in a way that protects the organization and its mission. Call us today at (949) 892-1221 or reach out to us through our contact page.