If You Are Considering a Nonprofit Closure

What's the expected number of nonprofit closures?

Hard numbers regarding current or expected nonprofit closures are difficult to come by. It’s a bit early to access timely IRS 990 data, so right now we have to rely on surveys of self-reporting nonprofit leaders to try and gauge the level and extent of the coming nonprofit bloodbath.

There have been several good and recent surveys of this type.  Both report similar findings, but only one seems to directly ask the questions: are you expecting to cease all operations because you cannot operate remotely? When looking at the numbers related to the expectation of a complete shut-down of services, you can take the very conservative number of 10.5% reported via a recent survey by Charity Navigator or the 71% reporting a significant reduction in services or operations in a June survey by Independent Sector. The reality will likely fall somewhere in between.

In both surveys the majority of responders reported, on average:

• Financial hardship related to the pandemic (80+%)
• A cut back on service provision or key programs (64% - 71%)
• An increased demand for services (64%)
• Reduction in staff, either through lay-off or furloughing (25%-50%)

OK, so let’s face it:  these are scary numbers that seem to equal more than 10% U.S. nonprofit closures.  In Australia, they report expecting 1-in-3 charities to close their doors (and AU/NZ have a much better system for supporting charities than in the U.S.). In the UK, again over    30% report they are likely to cease operations.

Before you are one of the 30%, it's likely your charity and services are worth some "out of the box" thinking to try and salvage your nonprofit operations.

Be creative before you close

Can you merge or join forces with other like charities or programs? Previously, it may have seemed an unlikely or unnecessary option, but look again.

Are there funding sources out there that you haven’t tried? Go back to every supporter you have EVER had and make the ask – for anything they can do.  Also, take a look at lists of COVID-19 resources that are available to nonprofits.

Can you “bootstrap” your operations, a process of using only existing resources, such as letting your lease go and using your home office indefinitely, relying on the existing technology and office supplies you have with no new purchases, reducing to a skeleton staff, reducing salaries,  etc. ? You do this until you renew or find new sources of funding. Note: You should have your boards support to take this course.

Can you “hibernate?”  That is, don’t officially closer the doors, just tell all funders and consumers that you are temporarily putting the nonprofit on-hold until you have some additional clarity into the viability of your nonprofit operations. Lay off and/or furlough all staff, including yourself, but volunteer to be a contact point for funders and donors, as well as clients seeking referrals. Note; You’ll need the board’s approval to do this.  

When to call it “quits.”

This is a painful decision and will likely be avoided at all costs for as long as possible.  It isn’t in most leaders’ DNA to give up the ghost, but there are times when that is the only alternative. Here are a few:

• You cannot cover bills you are legally obligated to pay such as salaries, payroll taxes or rent.
• You and/or your staff cannot afford to take a cut in pay and need to go elsewhere to seek employment
• You cannot pay for insurance that mitigates board and leadership risk such as  general liability or D&O insurance
• You are unable to recruit volunteers to adequately fulfill staff roles
• Your current funders notify your organization that they no longer can or will fund your operations
• You cannot provide high quality (or in some cases, any) services to consumers
• Your board orders you to terminate and inform the IRS, in order to manage risk

Experts recommend that these steps be taken in the event of closure: 

So, you did your best to stay alive, but it couldn’t be done.  It’s not your fault and it’s time to move on.  Before you do, there are some steps that are recommended to tie up all operations in a professional manner:

Notify Employees: Let your employees know about the impending shutdown. If possible, provide job counseling and severance pay.

Take Care of Clients: Make sure that your customers are taken care of. Perhaps they can be referred to another nonprofit. Subscribers or members can be given refunds.

Inform Donors: Let your donors know what is happening. Do this before they find out from the rumor mill or in the news. Inform donors how any remaining funds will be used. Will they go to pay debts? Will they go to another nonprofit? Will you refund recent donations?

Pay Debts: Either pay your outstanding debts or work with your suppliers to settle those debts. If debts outstrip remaining funds, consider declaring bankruptcy and work with an attorney to file. Although creditors cannot force a nonprofit into bankruptcy, the board can choose to declare chapter

Document the Life of Your Nonprofit: Write down what your nonprofit has done, its history, its research, any knowledge gained. Give the documentation to a library or historical society. Or pass it on to other nonprofits that might benefit from your experience.

Honor Staff, Board, and Volunteers: Give them credit and thank them. Inform staff of their rights regarding retirement funds, health insurance, unemployment compensation, and any job transition services you might offer by contracting with another organization.

Hold a Board Meeting and Vote on the Dissolution: Record that decision in the board minutes.

Inventory All Assets: such as money, furniture, web domains, property, mailing lists, etc. Then pass them on to another nonprofit, sell them and use the proceeds to pay your bills, or return them if appropriate.

File a Formal Intent to Close With Your State: (usually the Secretary of State office).

Submit a Final Form 990 Tax Return With the IRS: within four months and 15 days of terminating your organization.

Withdraw  state charitable solicitation registrations. In many states, a terminal filing is required. If any solicitation by the organization occurred in that last year of operation, the nonprofit needs to report its final 990 and anticipate additional expenses even after it has dissolved.

Pat yourself on the back

We are all living through a nightmare time when few outcomes are as planned.  You were a talented nonprofit leader before the pandemic and you will be after.  And the world will need your skills.  And please accept your community’s thanks for a job well done.