Financial Actions and Regulations
Once the decision to dissolve has been made, the nonprofit must stop operations, except to end activities. Assets of a nonprofit can only be used for exempt purposes, not for staff or board members. To dissolve a nonprofit in California, approval is needed by members or directors. For voluntary dissolutions, assets are distributed to similar organizations. The state Attorney General ensures procedures are followed when assets are distributed after debts are paid. IRS requires forms to be filed and assets to be distributed for exempt purposes.
Compensation and Revenue Generation in Nonprofits
Non-profit founders earn money for running the organizations they founded. Likewise, they can compensate full-time and part-time employees for the work they do. Nonprofits can pay their staff – especially directors and CEOs – very well. Nonprofit organizations invest their finances in advancing their activities and advancing a cause rather than earning a profit. Funding may come from several sources, depending on the type of organization. Grants and donations are seen as typical ways for nonprofits to make money.
Handling Excess Funds
If a nonprofit’s unrelated money-making activities get too big and swallow up the charitable goals, then the organization can lose its tax exemption.
A nonprofit can safely make a profit, but income from certain types of money-making activities may be taxed. If the activity is “related” to the nonprofit’s stated purposes, then the money received is not usually taxed. Surplus occurs when revenue exceeds expenses. At year-end, if there is money left over, it can be set aside as a reserve to cover expenses in the next year or beyond. Nonprofit organizations must have a reliable income to cover costs such as office space, employee salaries, equipment, marketing, and day-to-day operations. As a general rule of thumb, nonprofits should set aside at least 3-6 months of operating costs and keep the funds in reserve.
The board members decide which nonprofit gets the leftover money. The nonprofit has to file paperwork with the state and the IRS to inform them the nonprofit is closing. The critical thing to remember is that these dissolution requirements govern the distribution of your nonprofit’s assets.