In Arizona, there are three ways a nonprofit corporation can be dissolved: voluntarily, administratively, and judicially. Judicial dissolution is the product of litigation, whereby a judge orders the corporation to dissolve as a remedy to the case. Voluntary and administrative dissolutions are much more common than judicial dissolutions. As such, this blog with focus on these two types of dissolution.
Administrative Dissolution
Administrative dissolution occurs when a nonprofit corporation fails to comply with certain statutes or requirements imposed by a state agency. The Arizona Corporation Commission (ACC) has the authority to administratively dissolve a nonprofit corporation. Common reasons for administrative dissolution include:
Failure to File Annual Reports. Nonprofit corporations are required to file annual reports with the ACC, providing updated information about the corporation’s officers, directors, business address, and statutory agent. Failure to submit these reports within 60 days of their due date will result in the ACC administratively dissolving the corporation.
Failure to Maintain a Statutory Agent. Every corporation in Arizona must maintain a registered agent who is responsible for accepting service of process for the corporation. If a corporation fails to maintain a registered agent or if corporation’s statutory agent resigns and is not replaced, the ACC will dissolve the corporation.
Failure to Maintain a Known Place of Business in Arizona. Each corporation incorporated in Arizona must maintain a business address within the state. If a corporation fails to maintain a known place of business in Arizona, the ACC will dissolve the corporation.
Failure to Pay Fees. In the event the corporation fails to pay any fees or penalties imposed upon it, the ACC will dissolve the corporation.
Once a nonprofit corporation is administratively dissolved, it continues its corporate existence but may not carry on any activities except those necessary to wind up and liquidate its affairs.
Corporations that have been administratively dissolved may apply to the ACC for reinstatement, which typically involves curing the issues that led to the corporation’s dissolution and paying a fee. If the corporation has not applied for reinstatement within six months of its administrative dissolution, the ACC will release the corporate name for use by other entities/individuals in the state.
Voluntary Dissolution
Voluntary dissolution occurs when the nonprofit corporation’s directors decide to terminate its existence. The process of voluntary dissolution generally involves:
Approval by the Board and Members. To voluntarily dissolve a nonprofit corporation, the nonprofit’s board of directors must vote to approve a plan of dissolution in accordance with the nonprofit’s Articles of Incorporation and Bylaws. If the corporation has members entitled to vote on the matter, the Board must take the additional step of recommending dissolution to the members. In these cases, the members must also vote to approve the plan of dissolution before it is effective.
If the corporation’s Articles of Incorporation or Bylaws requires third party consent for dissolution, the corporation must also obtain consent from those third parties before the plan of dissolution is effective.
Obtain Tax Clearance Certificate. In many cases, prior to dissolving, a nonprofit corporation must obtain a tax clearance certificate from the Arizona Department of Revenue. This certificate is filed with the ACC.
Filing & Publishing Articles of Dissolution. After securing all the requisite approvals and the tax clearance certificate (if applicable), the corporation must file Articles of Dissolution with the ACC. The Articles of Dissolution includes essential information about the dissolution, including the date the dissolution will take effect and a statement affirming the corporation’s compliance with the proper dissolution procedures. The Articles of Dissolution must also be published in a newspaper or other periodical of regular circulation in the county where the corporation is located.
Notice to Creditors. Upon filing Articles of Dissolution with the ACC, the corporation is required to provide notice to its known and unknown creditors and claimants. The notice serves as an opportunity for creditors and claimants to assert any claim against the corporation before the corporation’s assets are distributed.
Distribution of Assets. Once all debts and liabilities are satisfied, the nonprofit’s assets are distributed according to the corporation’s governing documents. Those nonprofit’s that are tax-exempt must distribute their assets to a 501(c)(3) organization or to the federal, state, or local government for a public purpose.
Once a nonprofit corporation is voluntarily dissolved, the corporation continues its corporate existence but may not carry on any activities except to wind up and liquidate its affairs.
Administrative vs. Voluntary Dissolution
We get many calls from clients asking whether it makes more sense to voluntarily dissolve their nonprofit or simply abandon the corporation and allow it to be administratively dissolved. Many times, clients mistakenly believe that administrative dissolution is the better option because it requires less work and is essentially free. Though these considerations are not incorrect, administrative dissolution is not the proper mechanism for ending a corporation’s existence.
Administrative dissolution is a penalty for failing to comply with a state law or regulatory body. Accordingly, there are significant downsides to administrative dissolution. For example, corporations which have been administratively dissolved remain subject to future actions by creditors and claimants. Further, administrative dissolution may destroy the corporate veil for directors and officers. Meaning, directors and officers might be held personally responsible for the administratively dissolved corporation’s debts and liabilities. Finally, if the directors and officers start a new corporation in Arizona in the future, they will have to disclose that they were a director or officer of an administratively dissolved corporation, and answer questions about that from the ACC.
Voluntary dissolution is undoubtedly the more expensive and time consuming option. However, best practice is to voluntarily dissolve. Voluntary dissolution preserves the directors’ and officers’ reputation and goodwill in the community, ensures those individuals continue being shielded by the corporate veil, and protects them from future actions by creditors and claimants.
Kyler Mejia is an attorney (bar admission pending) with Caritas Law Group, P.C. Kyler counsels nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising matters nationwide and advises donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.Â