If your nonprofit organization has lost funding or the need for its services, you may need to dissolve the 501(c)(3). Closing the nonprofit corporation can protect the board of directors and limit future creditor claims and liabilities.
State law and the Internal Revenue Code govern the nonprofit dissolution process. You must file Articles of Dissolution with the secretary of state or the Arizona Corporation Commission, and file a final Form 990 for the short tax year.
This guide shows how to get board approval, write a plan of dissolution, notify creditors, settle debts, file final tax returns, and seek a Certificate of Tax Clearance.
Key Takeaways
- Board must adopt a dissolution resolution, file Articles of Dissolution with the Arizona Corporation Commission, and include the organization’s EIN and final Form 990.
- File a final Form 990 (mark Terminated), attach Schedule N, and send payment through EFTPS by the normal filing deadline.
- Notify the IRS and state attorney general, alert creditors by mail or public notice, and publish Articles within 60 days, affidavit within 90 days.
- Settle debts, complete final payroll filings (Form 941, W-2), give employees 60 days notice, and retain records for at least three years.
- Obtain an Arizona tax clearance and final Certificate of Dissolution before closing bank accounts and transferring remaining assets to another 501(c)(3).
Legal Steps to Terminate a 501(c)(3) Organization
Get board approval and draft a short resolution that lists your employer identification number, final Form 990 filing, and Schedule N entries. Notify the IRS and the state attorney general, pay final taxes through the electronic federal tax payment system, and record asset distribution under your articles of incorporation.
Obtaining Board Approval
The board must adopt a resolution to approve dissolution. Include the Plan of Dissolution in the meeting notice sent to voting members and directors. Hold a formal vote at a meeting called under the bylaws and the articles of incorporation.
File a certified copy of the adopted resolution with the state attorney general if state law requires it. Keep minutes, the resolution, and notices to support IRS notification and changes to tax-exempt status or your EIN.
Review past Form 990 filings and any Schedule N entries as you prepare final tax steps.
Drafting a Resolution and Dissolution Plan
Directors draft the Plan of Dissolution as part of the board approval process. It must state how nonprofit assets will move and how assets distribution will meet governing documents.
The plan must name any qualified recipient, such as another tax-exempt organization under section 501(c)(3). It must cite the employer identification number for transfers and list required filings, like final Form 990, Form 990-EZ, or Form 990-N.
Lawyers or accountants often add steps that show compliance with state rules and the attorney general’s office. The document can direct charitable contributions, refunds, or transfers of assets and note any restrictions.
It should flag which assets need separate handling, for example gifts with donor restrictions or grant funds tied to Form 990-PF reporting. Officials then use the plan to close accounts, file final returns with the IRS, and submit articles of dissolution.
Sending Notice of Dissolution Meeting
You must send written notice to all board members and key stakeholders. The notice must include the Plan of Dissolution and any supporting documents required by state law.
Proper notice is required for the meeting to be valid under IRS rules and state nonprofit statutes. Include the organization EIN, taxpayer identification number, and copies of relevant filings such as final Form 1040 entries, EFTPS payment receipts, or BizFilings confirmations, and consult resources like Propel Nonprofits as needed.
After the meeting, direct remaining assets appropriately according to the dissolution plan and applicable exempt organization types rules.
Directing Remaining Assets Appropriately
Direct remaining assets to another qualified recipient if the organization stays tax exempt. Follow the nonprofit’s governing documents and state rules in the united states, and record each transfer in a grant agreement signed by the board and the receiving nonprofit or governmental entity.
Use the organization’s EIN or employer identification number on transfer paperwork and on final filings to link the gift to the dissolved entity.
Accept in-kind transfers only if the receiving charity formally agrees in writing. Include details about asset value, intended use, and any restrictions in the grant agreement. Keep copies for final tax returns and for any inquiries about tax fraud, identity theft, or audits tied to the EIN.
Submitting Articles of Dissolution
File Articles of Dissolution with the Arizona Corporation Commission to start the legal dissolution process. Include your EIN and employer id number and attach the board resolution and any required corporate forms.
Mail or e-file the Articles and keep proof for state and IRS records, and complete final payroll filings such as form 941 and form W-2. Notify the IRS of the dissolution, report any earned income credit or child tax credit issues, and include identity protection pin information if it applies.
Publishing Articles of Dissolution Publicly
Arizona law requires publishing Articles of Dissolution within 60 days after Commission approval. Publish in a newspaper of general circulation in the county of the nonprofit’s principal office.
File an Affidavit of Publication within 90 days of Articles of Dissolution approval with the Commission. Include the organization’s EIN and the approval date in the notice. Ask tax counsel to review notices under circular 230.
Keep copies for final IRS filings such as Form 990 and any Form 4506-T requests. Collect Form W-9s from recipients if you transfer assets. Do not omit Form 9465 or Form 1040-X if related tax issues arise for individuals.
Send the Affidavit to the Secretary of State or the Commission as proof. Next, alert creditors of dissolution.
Alerting Creditors of Dissolution
Publishing the articles signals the public phase, so the board must move next to alert creditors of dissolution. Assign a person or small team to find and list all known creditors.
That designee must send a written letter to each known creditor by mail, stating the organization, its EIN, and the planned wind down. Unknown creditors need notice by public advertisement in a local paper or other widely read outlet.
File final payroll forms, including Form W-4 for employees, and use Form 2848 if you grant tax representation. If any contractors or foreign individuals need identification, include guidance on Form W-7 for ITIN requests.
Resolving Outstanding Debts
Board must clear all debts before filing dissolution with the Internal Revenue Service. Use the organization’s EIN to pull account records, issue final invoices, and notify creditors by letter.
Liquidate assets, like equipment and furniture, to raise funds for those creditors. Hire legal counsel and an accountant to list debts and prioritize secured obligations.
File final tax returns, including Form 990, and mark them as final returns; report asset sales and debt payoffs to the IRS. State attorney general offices often require proof that creditors received payment before approving dissolving a nonprofit.
Keep records in accounting software and retain bank statements and receipts for at least three years.
Completing Final Tax Returns
File a final Form 990 or 990-EZ in Arizona, showing taxes for the short tax year that ends on the dissolution date. Mark the Terminated box on Page 1 of Form 990 and attach a completed Schedule N.
Include your EIN on the return and send it to the IRS by the normal filing deadline.
Have a copy of the final return for state records and for the IRS audit trail. Contact the IRS or the Arizona tax office if you need help, then prepare to apply for a tax clearance certificate.
Applying for a Tax Clearance Certificate
After filing final tax returns, request a tax clearance letter from the Arizona Department of Revenue. Arizona requires proof that all tax obligations have been satisfied before it will issue a Certificate of Dissolution.
Include your EIN and copies of final Form 990 or other federal filings with the request. Send the clearance letter to the Arizona Corporation Commission as part of the dissolution filing to obtain the final Certificate of Dissolution.
Business Procedures for Closing a Nonprofit
Settle payroll, close the bank account, cancel leases, handle insurance, and transfer assets under your EIN and Form 990 rules—read more for step‑by‑step help.
Paying Off Debts and Allocating Remaining Assets
Board must pay creditors and close accounts tied to the organization’s EIN. Trustees approve settlements, notify creditors, and negotiate payment plans. The group may sell assets or draw on reserves to cover outstanding bills.
An attorney or accountant can help list debts and prepare proof of payment.
After debts clear, the board transfers remaining assets to another nonprofit or governmental entity as the governing documents require. The treasurer files the final Form 990, gives transfer records to the receiving organization, closes the bank account, and seeks any required tax clearance certificate.
Managing Leases, Employees, and Contracts
Give landlords 30 to 90 days written notice under each lease agreement. Check each contract for early termination clauses and penalties. Hire legal counsel to review vendor contracts and service agreements.
Factor how complexity varies based on existing leases, employees, and contracts.
Tell employees about closure at least 60 days before the final payroll date. Run final payroll through your payroll system and issue W-2s with your EIN. Offer required benefits information, file unemployment reports, and follow COBRA rules where they apply.
Use an agreement tracker to record signed releases and contract terminations.
Liquidating Organization Assets
Sell or donate items that no longer serve the mission. List bank accounts, inventory, office equipment, software licenses, and fundraising platform balances. Get appraisals for high-value assets.
Use auctions or sealed bids to get fair market value. Close accounts tied to the EIN after transfers clear. Track each sale with receipts and timestamps.
Liquidating assets may be necessary to satisfy outstanding debts and obligations. Pay creditors first and follow the dissolution plan and state rules for nonprofits. Give any remaining funds to another 501(c)(3) as the articles require.
Keep records for final tax returns and a tax clearance certificate. After you finish asset transfers, address insurance matters.
Handling Insurance Matters
After you liquidate assets, review the nonprofit’s insurance policies and files tied to the EIN. Check each policy with the insurer and your insurance broker. Note which policies use claims-made coverage and which use occurrence-based plans.
Claims-made policies appear more often for nonprofits.
Ask the broker about tail coverage and cost to prepay it. Prepaying tail coverage may extend protection against future claims. Send a Certificate of Insurance to the state insurance regulator if required.
Close policies only after you clear creditor claims and file final tax returns.
Transferring Remaining Funds
Having addressed insurance matters, move to transferring the nonprofit’s remaining funds. Document every transfer with a grant agreement and note the organization’s EIN on the paperwork.
Use the organization’s bank account to cut checks or wire funds to an eligible 501(c)(3) or a government entity.
Offer in-kind transfers if the receiving nonprofit or governmental entity accepts them. List donated items, assign fair market values, and sign the grant agreement to record the gift.
File copies with final tax paperwork and retain them for at least three years.
Conclusion
You learned the legal steps, from board resolution to filing articles of dissolution with the state. Follow the Plan of Dissolution, notify creditors, settle debts, and file the final 990 tax form with the IRS.
Get a tax clearance certificate and the final Certificate of Dissolution from the Arizona Corporation Commission when state requirements are met. Handle leases, payroll, insurance, and asset transfers while using your ein to close accounts and report payroll taxes.
Act now, consult a nonprofit attorney or CPA, and protect your directors as you wind down operations.
FAQs
1. What is the first step to dissolve a 501c3 with the IRS?
Vote to close the group as your bylaws say. Keep a clear record of the vote and your meeting notes. Tell the state agency that handles charities, and gather your legal papers. You will use your ein (employer identification number) on the final filings.
2. Do I need to file a final tax return?
Yes. File your final annual tax form and check the box that says final return. Put your ein (employer identification number) on the form. I once guided a small board through this step, and the clear record made the rest simple.
3. How do we handle leftover assets?
You must send assets to another tax exempt group or as the law says. Write who will get the assets and keep proof. Give the recipient’s name and their ein (employer identification number) if you have it.
4. Do I need to tell the IRS after the state closes us?
Yes. Send the IRS the final tax form and a copy of your dissolution papers when you can. Use plain records so the IRS can see the vote, the asset plan, and your ein (employer identification number).
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.