By Amy Coates Madsen and Paddy Morton
Since its inception, the Standards for Excellence Institute has always stressed the importance of a strong and well-functioning board of directors. As stated in the Standards for Excellence: An Ethics and Accountability Code for the Nonprofit Sector, “Nonprofits depend upon effective leadership to successfully enact their missions and programs. Effective leadership consists of a partnership between the board and management, each of which plays an essential role.”
Board members are in a position of trust and serve in the vital fiduciary role – working to ensure that the organization stays true to its mission, is healthy and sustainable —always working in a manner that is in the best interests of the organization. But, what happens when the organization must make the difficult decision to shutter its doors and go out of business? During these unprecedented times, we will likely see more nonprofits in our communities closing their doors and going through the dissolution process. Candid has recently released a report that focused on the financial futures of a set of over 300,000 US based nonprofits focused on 20 possible future scenarios. As part of this research, the report found that in their “median baseline scenario,” about 22,000 additional nonprofits (or 7 % of the nonprofits) are anticipated to close due to the COVID-19 crisis. This is in addition to the 4 % of nonprofits (or 12,042 nonprofits) that would dissolve even in the absence of a crisis (also in the median baseline scenario). The report also shared more optimistic and more dire scenarios.
Board members have the important responsibilities for evaluating the legal and financial health of the organization and in some cases, as a result, the board may discern that the best approach is to find a new home for the mission and the programs and dissolve an organization that is struggling financially. The principles for strong board governance that guide boards to meet their obligations in good times, including the fiduciary duties of care, loyalty, and obedience, must be embraced when considering whether dissolution is appropriate, as well. Board members must be guided by what is best for the organization even in the midst of considering dissolution.
How is the board involved in the dissolution process? In most states, if the directors serve as the members of the corporation, the board is charged with making the decision to dissolve and, if the organization has a broader membership, the members likely must vote to dissolve the corporation. Typically, the articles of incorporation or the bylaws of an organization specify the percentage of members who must vote in favor of dissolution. These clauses in the nonprofit’s organizing documents must be carefully followed and considered.
The decision to dissolve is a tough one and typically includes the drafting and approval of a plan of dissolution which describes how the organization intends to distribute its remaining assets and satisfy its remaining liabilities. The plan should identify all assets and liabilities, describe how liabilities will be satisfied, which nonprofit organizations will receive the remaining assets, and the fair market value of those assets, if possible. It is often good to identify who is responsible for what task and by what date such task should be completed in order to maintain accountability throughout the dissolution process. Frequently, an officer of the board will remain available for a year following dissolution to respond to administrative issues that might arise.
The Standards for Excellence educational packet on Strategic Partnership includes a special document called “Guide to Dissolving a Nonprofit (Nonstock) Corporation” which includes: overview of the dissolution process, state requirements, making the decision to dissolve (a sample dissolution resolution is provided), notifying the organization’s creditors (a sample letter to known creditors is provided), filing articles of dissolution (sample articles of dissolution is provided), distributing the nonprofit’s assets, as well as a discussion of IRS oversight.
The full series of Standards for Excellence educational packets include sample policies, tools and model procedures to help nonprofits achieve best practices in their governance and management. They can be accessed by contacting a licensed Standards for Excellence replication partner, one of the over 150 Standards for Excellence Licensed Consultants, or by becoming a member of the Standards for Excellence Institute.
Padraic (“Paddy”) McSherry Morton has been providing legal services to Maryland Nonprofits’ members since 2002. Prior to her work with Maryland Nonprofits, Ms. Morton was an Associate with Whiteford, Taylor & Preston, LLP and Law Clerk to the Honorable William M. Nickerson of the United States District Court for the District of Maryland. As General Counsel, Ms. Morton provides startup services, advises on strategic partnerships including structural reorganization and corporate integration, negotiates critical contracts, and consults on governance and management strategies and implementation. Ms. Morton has served in a leadership capacity on numerous boards and community activities. Ms. Morton gained her law degree at the University of Maryland School of Law, J.D., 1991. She holds a B.A. in English and Philosophy from Georgetown University. She is a licensed consultant with the Standards for Excellence® Institute.