NonProfit Mergers and Dissolutions

The coronavirus outbreak is wreaking havoc across the globe, and nonprofits are especially vulnerable. With increasing unemployment and economic uncertainty in combination with state and local budgets in turmoil, it is reasonable to expect that the current perilous climate for nonprofits is going to persist for the foreseeable future. However, there are routes less traveled by nonprofits that may offer a path to survive this crisis: merger, consolidation, and dissolution.

NonProfit Mergers or Consolidation

Mergers and consolidations are two technically different methods of achieving the same goal: combining two nonprofits. A combination, when executed through clear communication of mission, interest and goals between or among the parties, may alleviate the near and long-term issues arising from COVID-19.

Article 9 of the New York Not-for-Profit Corporation Law provides two pathways for nonprofits to combine: a merger and a consolidation.

In a merger, one constituent corporation merges with and into the other, with only one of the constituent corporations continuing to exist following the merger. The entity whose existence continues is referred to as the surviving corporation.

In a consolidation, each constituent corporation is dissolved and reforms together as a new nonprofit. The statutory process to merge or consolidate is substantially the same.

 Voluntary Dissolution

Dissolution prevents the corporation from drifting into insolvency or wasting its remaining assets. However, merely suspending activities is not equivalent to dissolution.

Even though the corporation pays its debts and settles its liabilities, if it lingers as a no-asset shell it might be fined or suspended for failure to file tax returns and reports. A dissolution terminates the corporation’s legal existence. The directors or officers are no longer responsible for annual corporate filings or otherwise maintaining the corporation.

In a voluntary dissolution, a corporation notifies all known creditors that it is winding up its affairs. Members and directors of the dissolving corporation must approve the decision to wind up and dissolve, and the plan of liquidation and distribution of assets.

The corporation must notify the state Attorney General’s office of the planned liquidation and distribution, and request a written waiver of objections. Then obtain a certificate from the Franchise Tax Board that its taxes have been paid or adequately provided for. When all steps have been completed, the corporation files a certificate of dissolution with the Secretary of State and notifies the IRS through the filing of a final tax return.

For more information or assistance with a nonprofit merger dissolution, call us today.