Social welfare nonprofits are often established to provide a tax-exempt vehicle for organizing around a specific political topic. Under Section 501(c)(4) of the Internal Revenue Code, social welfare nonprofits are permitted to focus their operations on a range of political activities, including lobbying for legislation. But once an organization’s purpose has run its course—say, when the lobbied-for laws are passed—the nonprofit’s management has important decisions to make and steps to take.
- Consult the organization’s governing documents.
Many nonprofits are established for specific purposes. Once an organization’s purpose is fulfilled or rendered moot its organizing documents may specify what is to happen next. Some organizations are required to wind up their affairs, while others are permitted to pivot to another goal that is consistent with the original purpose. In some cases it may be possible to amend the organization’s governing documents to allow it to continue to function, but such amendments must be done with care to avoid violating stakeholder rights or risking the loss of the organization’s tax-exempt status.
- Make an accounting of assets and liabilities.
Before complying with a requirement to wind up, or making a voluntary decision to do so, the organization needs to take stock of any lingering obligations it may have to creditors, donors, and contractors. Contracts should be reviewed and outstanding obligations paid. Some nonfinancial obligations, like confidentiality agreements, can have real importance in the course of winding up a nonprofit, as legal duties can linger long into the future.
- Identify an appropriate next phase.
Regardless of whether the organization will dissolve or carry on, it will need to decide what to do with the assets that remain after its debts are paid. Where an organization has flexibility to plot a new course after the campaign is over, the existing assets may be available for the new purpose. If the organization will dissolve, it will need to identify a suitable recipient for its remaining funds. This process must be informed by the organization’s governance documents, agreements with donors, and reputational considerations. Bear in mind that a social welfare organization must file a final return with the IRS that discloses, among other things, the recipients of distributed assets. These returns will be analyzed to determine if an individual, rather than another profit, has benefitted from the organization’s dissolution.
A nonprofit attorney can help chart the course
The Church Law Center of California provides governance advice to religious and secular nonprofits. We help clients plan for the long term and make necessary changes to their organizations’ goals while complying with the law. To learn how we can help your organization, call us today at (949) 689-0437 or reach out to us through our contact page.