“"When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another...”
― Preamble, Declaration of Independence
For many exempt organizations, once they’ve been legally formed and obtained their ruling from the Internal Revenue Service, they proceed to faithfully carry out their mission, day after day, year after year. The serve their clients, students, or customers, build and improve their staff, hold board meetings, engage with their donors, raise funds and receive grants. They know their mission, they have an established culture, and it serves them well as they do their work. Life is good.
This ideal is not always the reality, however.
Turnover in staff leads to irregular or disjointed operations. Donors shift their focus and support to other, newer causes. Grants are no longer available. Volunteers, including board members, are harder to find. Perhaps the focus of the mission has even been achieved. All of these can leave an organization’s leadership asking, what now?
It may be time for a “fundamental change,” much like the Founding Fathers led the colonies in 250 years ago. While not undertaken often, these fundamental changes, whether amending governing documents, engaging in a merger, or even dissolution including ceasing operations, going forward for the nonprofit.
Amendments
After reviewing the articles of incorporation and bylaws, leadership may realize that provisions are no longer being followed, are out of date, or simply no longer serve the organization’s needs. When that is the case, it’s time to consider amending them.
What should be considered? Start with making sure these documents don’t violate any required provisions of the Nebraska Nonprofit Corporation Act, Neb. Rev. Stat. § 21-1901 et seq. For instance, do the articles say that the organization can have only one director? (Three is the statutory minimum.) Do the bylaws permit action by the board of directors without a meeting by less than a unanimous vote? (Not permitted by statute.)
Alternatively, are there provisions which the organization didn’t focus on and is violating? Do the governing documents limit membership to men only but the organization has admitted women as members? Do the bylaws prohibit board action without a meeting but the board regularly uses written consents - unanimous, of course! – to conduct its business.
Amendments to the articles of incorporation and bylaws can address these examples and more. Amendments will need to be adopted in accordance with the existing documents and the Act’s requirements (Neb. Rev. Stat. § 21-19,105 through § 21-19,117), including giving notice of the proposed amendments and the vote thresholds required to adopt them. Amendments to the articles of incorporation must be filed with the Secretary of State and notice of the amendments published in a local newspaper.
Two important notes regarding amendments and exempt status. First, amended documents need to be included with the next annual information return (Form 990) filed with the Internal Revenue Service. Second, if the organization is considering a significant change to its purpose or exempt activities, it should investigate whether those might materially impact its exemption determination before approving them.
Merger
Mergers will generally be appropriate in two situations: a merger of two or more organizations focused on the same issues who can achieve efficiencies and greater impact by coming together, or a merger of two or more organizations, each of which brings strengths that offset the other’s weakness in an operational or programmatic area. In either of these cases, even if the organization no longer exists after the merger, its mission, resources, and programs continue – with some or all of its leadership involved - as part of the combined organization.
Recent editions of this newsletter discussed nonprofit mergers, including the process, so we’ll encourage you to read those editions rather than repeat them here.
Dissolution
If the organization has achieved its charitable purposes, is increasingly facing challenges in operations, whether staffing or securing funding, or no longer can find individuals willing to serve in leadership, dissolution may be appropriate. In this process, governed by Neb. Rev. Stat. § 21-19,129 through 21-19,145, a Nebraska nonprofit corporation winds up its affairs, satisfies its financial and legal obligations, and, if there are assets remaining, distributes them to another qualified exempt organization.
The organization’s leadership will need to develop a plan of dissolution, which sets forth the process it will follow upon approval. Once approved by the board of directors, and members, if the organization has them, notice for public benefit or religious nonprofits must be given to the Attorney General, who must also be provided the plan. The Attorney General has 20 days to review the plan, during which no assets may be transferred or conveyed by the nonprofit. Typically, if the Attorney General finds the plan in good order, they will issue a written advisory that they will take no action so long as the plan is followed.
Most dissolutions, but not all, have remaining assets that need to be distributed. Because exempt organization status requires dissolution to be addressed in the articles of incorporation, that provision should be referenced first. If it expressly states what exempt organization receives the remaining assets, the plan cannot change that provision. If it does not, then the plan itself should state what organizations take part in the distribution. Note that all organizations receiving assets from a public benefit or religious organization must themselves be exempt at the time of receipt.
Amendments to governing documents happen frequently, although perhaps not as often as they should, while dissolutions are somewhat less common, with mergers third in frequency of occurrence, although there are indications of increasing use. Whichever fundamental change may be necessary, it should only occur after planning and preparation. When that happens, though, the fundamental change can be for the better.
As always, thanks for reading.
This newsletter is for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.
