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Considering Temporary Shutdown or Dissolution

Given the fundraising and program revenue losses organizations have experienced due to COVID-19, some organizations are considering a temporary closure or dissolution. Before making this decision, it is important to evaluate the federal, state, and local government programs that are available to assist nonprofits in maintaining jobs.

Developing a financial projection

If your organization is at risk of going out of business, develop a 6-12 month financial projection to determine if you can continue operating. Do this quickly. Don't sweat the details. Focus on major cost areas like personnel and office rent and your most consistent revenue sources. We have created the 501 Commons Cash Position & Cash Flow Workbook which will help you with the calculations. Here are the steps:

    1.Determine your current cash position. What cash or liquid assets do you have available?

    2. Project your expenses on a monthly basis.

    • Consider what costs could be reduced. Could you reduce office space or continue working from home?
    • Determine your staffing needs. Remember to include employee benefits and employment taxes. It is illegal not to pay these costs in full.

    3. Project your cash on a monthly basis

    • Count grants only if you have received them on an ongoing basis or have been told you have a very strong likelihood of receiving the grant.
    • Talk to donors and funders to see if you can raise additional funds. If you have a restricted grant or contract, talk to the funder to see if they can convert the grant into a general operating grant or change your performance requirements.

    4. Develop a list of shut-down expenses that would still have to be paid if you temporarily or permanently close down. Liabilities include last paychecks, contributions to retirement accounts, unpaid employment taxes, and contractual obligations like leases.

    • Set aside those funds in a separate shutdown account so that you can cease operations legally and ethically.
    • You may be able to negotiate some payments to creditors but you are legally obligated to pay employees and taxes.
    • Once you put your "shutdown fund" in a separate account, do not touch the funds until you are winding down. Doing this protects the board from liability for unpaid obligations.

    5. Calculate your monthly "run rate," the level of expenses needed to operate the organization for one month.

    • Ideally you want to have at least two months of cash based on that run rate. This is especially important when you are navigating uncertainty.
    • Calculate how long you can continue operating based on projected expenses revenues and any reserve or working capital you have left after setting aside the amount needed in your shutdown account.

    Temporary Shutdown or Dissolution?

      Once you decide whether you are going to shut down temporarily or dissolve the organization, develop a communications plan for staff, volunteers, and other internal audiences. Then develop a communications plan for external audiences, including funders, partner organizations and clients/members.

      If you expect to shut down temporarily, determine your preferred timeline for reopening. Attempt to identify donors and funders that are willing to consider investing to restart the organization. Look into government loan programs like SBA loans for small business loans offered by your state.


      If the organization needs to close permanently, you need to complete the formal process called dissolution. you do not have the funds needed to pay employees and settle with creditors, board members need to contribute the funds necessary for the shutdown.  Board members should make these donations proactively, when the problem of insufficient shutdown funds is identified. Do not wait until shutdown is in process. If you have assets after paying off all payroll and tax liabilities and other debts, you must transfer them to a similar nonprofit organization. As a tax-exempt organization, you cannot give away or sell any assets to board members, staff, etc.

      Legal requirements

      Dissolution requirements and processes differ from state to state.  Check with your state's Secretary of State - or the department that regulates nonprofits - and the Department of Revenue in your state in learn your state's requirements.

      Formal vote. Your board needs to take a formal vote to dissolve your corporation in a board meeting with a quorum, acting in compliance with your by-laws.

      Learn your state's requirements. Check with the department in your state that regulates nonprofits to determine your state's procedures and obtain your state's form for articles of dissolution, e.g. Washington State articles of dissolution.  Some states require that you submit certified copies of your articles of dissolution and your 990 Form.

      File with the IRS. You need to file a final form 990 by the 15th day of the fifth month after the end of the period for which your tax return is due.  Also provide the IRS with a certified copy of your articles of dissolution (or merger.) Schedule N of Form 990 lists specific documents to be filed. They are available on the IRS website.

      There are three Form 990 options. The amount of assets and your gross earnings for the fiscal year that you are terminating (dissolving), determines which form you need to use.

      Dissolution resources

      Disclaimer:  This article does not constitute legal advice. Seek guidance from a lawyer who has experience with state laws regarding dissolution of tax-exempt organizations. You may also need the assistance of an accountant in preparing the final 990 submission.