This article provides an overview of the process that charitable nonprofit corporations incorporated in New York must follow to legally dissolve.

Most charitable nonprofits in New York must petition the Attorney General’s office or the court for approval before dissolving, following one of two procedures.

Voluntary Dissolution with No Assets

This simplified dissolution procedure is used for charitable corporations that have no assets or liabilities at the time of dissolution. It requires filing a petition for approval of a certificate of dissolution with the Attorney General’s office.  Under the New York Not-for-Profit Corporation Law (“N-PCL”), a dissolving corporation can use a simplified dissolution procedure if it has no more than $25,000 in a reserve fund to cover the costs of winding up its affairs (such as legal and accounting fees) and has liabilities that do not exceed $10,000. As a matter of practice, our firm generally waits until the corporation has no remaining assets or liabilities before filing a petition with the Attorney General’s office to approve a certificate of dissolution.  

For additional information, see the Attorney General’s published guidance on this “no asset” dissolution process.  

Voluntary Dissolution with Assets 

An “asset dissolution” occurs when a corporation has remaining assets to distribute before it officially dissolves. This process involves two petitions. First, the Attorney General must approve a petition for approval of a plan for dissolution and distribution of assets—referred to as the “Plan of Dissolution.” Second, once the approved Plan of Dissolution has been fully executed, a petition for approval of a certificate of dissolution must be submitted.

For additional information, see the Attorney General’s published guidance on this “asset dissolution” process.  

If you are unsure which procedures apply to your organization, consider consulting legal counsel to determine the appropriate process.

The Dissolution Process

    1. The Board of Directors must adopt a Plan of Dissolution.

The Board may adopt the plan at a board meeting or through unanimous written consent in lieu of a board  meeting. 

    2. The Plan of Dissolution must be approved by the voting members, if any.

To approve the dissolution of the corporation, at least two-thirds of the members must vote in favor during a membership meeting where a quorum is present. If the corporation’s governing documents allow it, member approval can also be obtained through unanimous written consent. If the corporation does not have “members” as defined under the N-PCL, then this step is skipped. 

    3. Obtain governmental entity approval to dissolve, if required.  

If government agency approval was required for the establishment of the corporation, the corporation must secure written approval for its dissolution from the same governmental entity. 

    4. Prepare a certificate of dissolution.  

The New York Department of State provides a template certificate of dissolution. 

    5. Ensure that all registration and reporting requirements are up to date.  

The corporation must be in compliance with the registration and reporting requirements outlined in section 8-1.4 of the Estates, Powers and Trusts Law (EPTL) and/or Article 7-A of the Executive Law before the Attorney General can approve the certificate of dissolution. If the organization has not complied, has been exempt from filing annual financial reports, or is not subject to the registration and reporting requirements, certain registration and financial reports will be necessary prior to dissolution.

    6. File Petition(s) with the Attorney General.  

As noted earlier, a simplified dissolution process for corporations without assets requires only one petition. By contrast, if an organization has assets, it must file two petitions with the Attorney General. Once approved, the Attorney General will issue an Order approving the Plan of Dissolution for the first step of an asset dissolution and/or return an endorsed copy of the Certificate of Dissolution indicating the Attorney General’s approval. 

Additionally, the corporation has the option to file a petition in court (specifically, in the State Supreme Court of the appropriate county) on notice to the Attorney General. However, this court process may take longer due to the involvement of two regulatory bodies.

    7. Obtain consent to the dissolution from the New York State Department of Taxation and Finance. 

This tax consent is obtained by submitting Form CT-247. Based on our experience, it typically takes at least 4 to 6 weeks to receive the consent, and it can sometimes take longer. This step can be completed concurrently with the submission of the petition or petitions to the Attorney General, as the consent is not required until the Certificate of Dissolution has been approved and is ready to be filed.

    8. File the approved Certificate of Dissolution with the New York Department of State.  

The Certificate of Dissolution must be filed along with any applicable governmental agency approvals and the tax consent.

    9. The Department of State will send the organization a filing receipt indicating that the certificate of  dissolution has been filed. 

  10. The corporation must send a copy of the filing receipt to the Attorney General’s office. 

Ensure that the corporation has complied with IRS requirements relating to the termination of an exempt organization.  

Additional Issues for the Dissolution Process

Final Grant Agreements

The final wind-down process may include the disbursement of final assets to one or more grantees.  This may require the drafting of grant agreements to ensure that the assets will be used for purposes aligned with the corporation’s purposes.

Tail Insurance 

The corporation may want to consider obtaining tail insurance to provide its directors and officers with additional protection for an appropriate period (perhaps 1-3 years) following the dissolution.  Consult with your insurance broker for options and pricing.

Timing 

While there is no official time period published on how long the Attorney General review process takes, in our experience, the time required for petitions to be initially reviewed can range from several weeks to several months.  Because an asset dissolution requires Attorney General approval of two petitions, asset dissolutions will take substantially longer to complete than the no-asset simplified dissolution process.  With respect to any submission, the Attorney General often requires additional information, documentation, and edits to the petition, which can further lengthen the time required for approval of the dissolution.

Special Procedures for Certain Organizations

Non-Charitable Corporations 

Generally, non-charitable corporations do not need court or Attorney General approval to dissolve, and the simplified dissolution procedure does not apply to them. However, trade associations that are dissolving must obtain approval from the Attorney General’s Antitrust Bureau. Additionally, if a non-charitable corporation holds assets for charitable purposes or has donor-restricted funds, it must follow the proper procedures for an asset dissolution.

Religious Corporations

Dissolution of religious corporations is governed exclusively by section 18 of the Religious Corporations Law. Court approval is necessary for the dissolution, but the Attorney General is not involved in the process. One of the notable requirements is publication of a notice in a local newspaper for four consecutive weeks regarding the planned filing of the court petition.

Grant-making Private Foundations 

According to an FAQ from the Attorney General’s office, private foundations that grant funds are allowed to spend down their assets by making charitable donations to other tax-exempt organizations as part of their normal operations. However, if a grant-making private foundation wishes to transfer its assets to another private foundation, it must obtain court approval. This can be done either through an asset dissolution process or by filing a petition under N-PCL sections 510 or 511.

Organizations with liabilities that exceed their assets

If a dissolving corporation has liabilities that exceed its assets and is able to negotiate the reduction or forgiveness of any debts with its creditors, it may opt for a simplified dissolution. In this case, the corporation should attach copies of any relevant agreements as exhibits to its petition. However, insolvent corporations must follow the procedures for judicial dissolution outlined in Article 11 of the N-PCL. In certain situations, filing for bankruptcy may be more suitable. It is advisable to consult with bankruptcy counsel to determine whether a bankruptcy filing is preferable and appropriate.

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Historically, New York’s NPCL did not allow nonprofit organizations to hold virtual membership meetings. That changed with the COVID-19 pandemic, when New York offered temporary flexibility to the boards of charitable and religious nonprofits.  Under the COVID-19 rules, boards of charitable nonprofit or religious organizations could unilaterally decide to hold member meetings virtually. Under the revised law, boards of nonprofit charitable organizations may unilaterally determine whether or not to hold member meetings electronically, as long as their certificate of incorporation or bylaws do not prohibit such a decision.

Similarly, the newly-created default rule under New York’s Religious Corporations Act (RCL § 28) is that a board of a religious corporation may organize a virtual membership meeting if the board is already authorized to determine the place of a membership meeting, under either the organization’s governing documents or another provision of the RCL. However, leaders of religious organizations should bear in mind that the RCL contains different provisions depending on the denomination of the organization – leaders must be careful to review their organizing documents as well as the applicable sections of the RCL to confirm whether they have the requisite power to call virtual membership meetings or, if not, whether they could amend their governing documents to acquire that power.

Any boards considering adopting a virtual format for their upcoming membership meeting should consult with an advisor to review their organizational documents. Any nonprofit or religious corporations whose certificate of incorporation or by-laws prohibits virtual membership meetings should consider whether and how to revise their documents to provide the board with additional flexibility. We anticipate that many organizations and their members will decide to operate under virtual or hybrid formats in the near future.

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While New York’s new law doesn’t affect nonprofits that are controlled by other nonprofits[i], the reasoning for New York’s change is instructive. It grew out of regulators’ and lawmakers’ concerns that a sole member structure is susceptible to abuse – a nonprofit controlled by one or two people is more likely to engage in self-dealing or private benefit transactions, both of which are prohibited under state and federal law.

New York’s restrictions on sole member structures comes at a time when charities regularly use corporate sole member structures as part of a variety of major transactions and strategies. Typically, the arrangement is used by a large, well-funded nonprofit that is either (i) forming a new entity in which to house a new activity, or (ii) taking control of an existing nonprofit.

A nonprofit sole member structure puts directors of the subsidiary in a challenging position because their fiduciary duties to the nonprofit can sometimes put them at odds with the interests and direction of the sole member. Below I walk through:  (i) what is a sole member structure; (ii) how sole member nonprofits are useful; (iii) when implementing a sole member structure, what are some challenges; and (iv) suggestions to help implement a sole member structure.

What is a sole member nonprofit?

Modern nonprofits are typically run by a board of directors that is self-sustaining – that means the board elects new directors to fill empty board seats. Historically, however, a nonprofit was a membership corporation and the “members” were responsible for electing the board. Who the “members” differed from organization to organization, but the members met at least annually and took an active role in electing the board of the organization. A good modern analogue is a labor union – the membership is active in electing the leadership, so even though the Board is still responsible for overseeing the union’s activities, the members can keep the Board in check. A membership structure parallels the shareholder structure of a for-profit corporations, where shareholders elect directors to the Board but are removed from the corporation’s day-to-day operations.

Many states’ laws still allow one person, or one corporation, to be the “sole member” of a nonprofit, retaining the right to elect and remove directors. There is no federal prohibition against that structure, provided that the controlled nonprofit and its Board observe all of the other rules applicable to 501(c)(3) organizations. The sole member structure, therefore, has been popular as a way to give individuals or large nonprofits the ability to keep control over a subsidiary nonprofit.

How are sole member nonprofits useful?

A sole member structure is really appealing when an individual or corporation creates a new nonprofit and wants to retain long term control over the nonprofit’s mission and activities. By making themselves the sole member, the founder can give themselves the power to appoint or remove board members. This allows the sole member to have a veto power over board decisions that the sole member disagrees with – they can always remove (or threaten to remove) board members who vote against the sole member’s interests.

Most founders use this veto power for good. The founder, who is passionate about the organization and its mission, is especially sensitive to mission creep. If they sense that board members are not pulling their weight or are moving the nonprofit in the wrong direction, the sole member can appoint new board members and remove the bad ones to get the nonprofit back on track.

Another scenario where we often see a sole member structure is a small nonprofit that is approaching an inflection point and is in need of assistance.  Enter a large financially-healthy nonprofit, able to take over back office and administrative functions for the smaller nonprofit. Both organizations recognize that the smaller nonprofit has developed goodwill, so they don’t want to just absorb the smaller nonprofit’s programs into the larger nonprofit – there’s a benefit to keeping the smaller organization as a separate legal entity, with its “brand” and support intact. The larger nonprofit’s board may also want to protect the larger nonprofit from liability by maintaining the separate legal entity.

Transaction costs are also much smaller in a change of control transaction involving a sole member compared to a traditional merger or acquisition – a sole member transition often requires little more than a minor revision to the bylaws to provide for a sole member. A formal merger with, or transfer of assets to, a larger nonprofit often requires regulatory approval and generally entails more legal fees and staff time to implement.

A third situation where we often see a sole member structure used is where a large nonprofit identifies a new market – either a new location where its programs can succeed, or a new type of program the nonprofit would like to implement. If the new market creates new types of legal or financial exposure, the large nonprofit might want to insulate itself by housing the new venture in a separate legal entity.[ii] The large nonprofit, to encourage the small nonprofit to be self-sufficient, could set the new nonprofit up as a separate 501(c)(3) public charit with its own board and staff. While there may be some start-up support, the goal is often to have the large nonprofit’s input be limited to high-level oversight and the appointment of the board members each year. The large nonprofit can ensure there’s no mission creep through its control of the board of the new nonprofit, but it owes no legal duty to the smaller nonprofit.

When implementing a sole member structure, avoid key pitfalls

Sole member structures can be very useful, especially when trying to quickly take over a nonprofit or when structuring a new organization to ensure it can be controlled going forward. It can also be an intermediary step to a full merger transaction.  But let’s step back for a minute to consider some of the practical and legal issues that can arise with sole member structures.

Donor Confusion

Donors want to know where their money and support is going. They want to feel like they understand the values of the organization they support and who is responsible for making decisions. That’s why nearly every nonprofit website includes an “About Us”, “Board”, or “Team” page that lets donors know who is in charge. By introducing a sole member structure, you risk confusing donors if the relationship isn’t clearly defined. Donors, especially your biggest donors, do not want to call up a board member to discuss a major decision, only to learn there’s another entity the donor has never heard of that controls the board.

Board Member Dilemmas

Nonprofit board members are often more familiar with the for-profit world than they are the nonprofit sector. In a for-profit, board members owe their fiduciary duties to the shareholders and the organization. That’s not the way nonprofit law works for 501(c)(3) organizations. In a 501(c)(3), even one with members, the board members’ fiduciary duties are owed to the organization and, tangentially, the public. But we have heard from board members at nonprofits controlled by a sole member who are confused or frustrated by the ways in which they believe decisions that would be in the best interest of their nonprofit are at odds with the sole member’s interests. For instance, the sole member may believe that entering into a management agreement with the controlled nonprofit would be in everyone’s best interests, but board members at the controlled nonprofit think the management fees the sole member wants to charge are too high.

Placed in that position, the controlled nonprofit’s board members can feel helpless – stand up for what they believe are the best interests of the controlled nonprofit and they risk being removed from the board, but yielding to the sole member could be a breach of their fiduciary duty to their organization. While it’s a difficult choice, legally the board members owe their loyalty first and foremost to the controlled nonprofit on whose board they sit. You need to make sure that board members are fully briefed on their obligations, both to protect the organization and uphold their legal duties as board members.

Staff Confusion & Fear

When staff members see a new organization come in as sole member, it can create anxiety about how operations will change. Nonprofits should clearly message what functions will and will not change. Similarly, governance, HR, and oversight functions should be reviewed to see how to efficiently operate with closely related organizations. In some scenarios, leaving in largely separate systems might make sense, whereas in others the new sole member might displace a number of the controlled nonprofit’s overhead functions.

Related Party Transactions

Governance best practices, along with many state laws, require independent board members to carefully review related party transactions. Wherever the sole member enters into a major transaction with the controlled nonprofit, best practice would require that only independent directors should be involved in reviewing and approving those transactions. The board of the controlled nonprofit is under a legal obligation to make sure that the transaction is fair to, and in the best interests of, that organization. In many cases, however, there is reluctance among board members to treat transactions with the sole member as creating a conflict of interest. Often we hear that the interests of both organizations are aligned, and the controlled nonprofit is wholly dependent on the sole member, so board members think it does not make sense to treat a transaction with the sole member as a conflict of interest. This conflates practical considerations with legal ones – just because a controlled nonprofit needs the sole member doesn’t mean it should accept any transaction with the sole member without proper consideration of alternatives.

Strategies to Implement a Sole Member Structure     

Now that we’ve reviewed some common pitfalls, let’s talk about some relatively simple structural changes that can mitigate the possible downsides of a sole member structure. Remember, there are many reasons why a sole member structure can be beneficial. As with any governance decision, a sole member structure should be well-considered and tailored to the needs of each organization at which its implemented.

Staggered Boards and Limited Removal Rights

Nonprofits should balance the control of the board by the sole member with directors’ fiduciary obligations. One way to do that is to stagger board terms (for instance, three year terms with 1/3 of the board up each year) and place some limitation on the sole member’s right to remove directors. The sole member might still have the ability to remove directors, but that right can be limited to “for cause” removals or require ratification by a majority of the board. By insulating directors slightly from the sole member, directors will have the space to speak critically when they feel the organization is being led down the wrong path.

Independent Directors

Another possible solution is for certain board seats to be reserved for independent board members, individuals who are NOT appointed by the sole member. This will likely be limited to a small minority of the Board, but a small number of directors can play a big role in providing assurance to the whole board that transactions, including ones with the sole member, are in the best interests of the controlled nonprofit. Independent directors can also be useful barometers of the board’s performance and governance.

Clear Messaging

Internally and externally, the sole member and the controlled nonprofit should make sure it is clear how the entities are related and how they work together. Donors deserve to know if money given to one organization will end up supporting another organization (albeit indirectly). Regulators want to know that transactions are properly and fairly approved. Staff need to know to whom they are answering and who is setting policy internally.

In conclusion

Corporate sole membership structures can be useful to all everyone involved. They can help grow and manage complex organizations. Sole member structures can also mitigate legal exposure to their parent nonprofits. As with anything, board members should be prudent when contemplating a sole membership structure. Potential pitfalls can be mitigated by embedding certain structural safeguards to protect the controlled nonprofit’s independence, which should ultimately provide reassurance to the boards of BOTH organizations that a healthy corporate structure is in place.

[i] Where a corporate entity is the sole member and the corporate entity itself is owned or controlled by at least three people.

[ii] There are many other options (such as an LLC) that could accomplish this goal, but we won’t get into those in this article.

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