Before You Close Your Church

By Raul Rivera

Change is an inevitable part of life. Seasons change, new opportunities arise, and old things must become new. Ecclesiastes 3:1 tells us that, “There is a time for everything, and a season for every activity under the heavens.” Sometimes these changing seasons involve having to close a ministry, and there are several reasons why doing so is necessary.

Although some churches close due to a lack of finances, a decline in attendance, key leaders leaving, or improper operations, not every reason for closing a corporation is a bad reason. There are churches that successfully merge together, uniting visions with the purpose of working as a larger unit in the Body of Christ in order to bring transformation to the city and local communities in which they operate. Some churches also choose to end one corporation and begin a new one simply because the governing structure has changed so much that it is easier to start anew, rather than revamp the old structure.

Perhaps you are finding that your church is in a similar situation, but you are not sure what to do. Whatever reason you may have for closing the current chapter of your ministry, I want you to know that you are not alone. We at StartCHURCH are here to equip you and your church with vital information to meet your needs no matter where you are at in the process. This may not be the most pleasant of topics, but it is an important one. This post is intended to help you navigate the murky waters of closing a corporation.

What it means to dissolve a corporation

The legal term for permanently closing a corporation is “dissolution”. According to Webster’s Dictionary, the word dissolution means “ending or breaking up of an assembly or a partnership or corporation”.

When dissolving a corporation, there are several key things to keep in mind:

• the assets of the corporation must be transferred to another charitable organization,
• there may be several state departments with whom you must coordinate to finalize the dissolution, and
• the current corporation must be properly set up in order to dissolve according to current nonprofit tax law regulations.

Let us take a closer look at some important aspects of dissolving a corporation, which you will want to remember should you find the dissolution of your corporation necessary.

5 important things to know before dissolving

1. Be sure that your corporation has the proper dissolution language in its organizing document. The IRS prefers that a nonprofit corporation have a dissolution clause to ensure that the assets of the organization will always be used for an exempt purpose. This is in keeping with their requirement that all nonprofits operate exclusively for public benefit.

If your articles of incorporation does not have the dissolution language, then you can simply amend your articles to include this important language.

2. Check with your state to find out the clearances needed in order to dissolve. For instance, some states require getting documentation from the attorney general or taxation department as a part of the dissolution process.

3. File your dissolution paperwork. Your board should first vote to dissolve the corporation.  Be sure to include all required state documents for dissolution filings. This may include articles of dissolution, meeting minutes, and clearances from other state departments, as mentioned above.

4. Distribute your assets prior to finalizing the dissolution. Review the assets of the corporation, determine where they will be donated according to the dissolution requirements for nonprofits. Internal Revenue Manual 7.25.3 discusses the proper operations of 501(c)(3) organizations. Furthermore, it states that the proper recipients of assets from a nonprofit organization that is dissolving include:

• organizations created for one or more exempt purposes;
• the federal government or a state or local government, for a public purpose; or
• a court appointed organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized.

Your board may vote to transfer your assets to any number of nonprofits if permitted within the dissolution clause. You may want to consider including more general language in the dissolution clause rather than naming one particular organization, which will allow you more leeway in the distribution of your assets.

5. Maintain documents for the dissolved corporation. You may need to refer to these documents on occasion for reference during board meetings, or for payroll and employment tax purposes as you transfer systems to the new corporation. IRS Publication 1828, a tax guide for churches and religious organizations, states that there is no requirement length for record retention. But the guide does recommend maintaining all corporate records for at least 4 years.

Handling dissolution at the federal level

Tax-exempt organizations that are responsible for filing Form 990 should ensure that they properly file the last Form 990. File the final Form 990 of the corporation by the due date and mark the appropriate box indicated in Form 990 for terminating the corporation.  Schedule N may also need to be filed for Form 990-EZ and Form 990 long filers.

Churches that are dissolving and beginning a new corporation are required to explain the transition in the 1023 application of the new corporation by attaching Schedule G. Schedule G is used for a corporation that is a successor taking over at least 25% of the activities and assets of a prior corporation.

There are no direct guidelines for notifying the IRS of church dissolutions when a new corporation is not being started in its place. If you do choose to notify the IRS of your church’s dissolution, be prepared to provide financial information, board meeting minutes, and other documents for them to ensure you are doing your due diligence.

The details matter

Each of these steps is an important part of the dissolution process. Each one ensures that state and federal guidelines are met and that important details are not lost in the process.

Dissolving a corporation can be an emotional process because transitions usually are. But you do not have to be caught off guard or tossed around in the whirlwind of decisions involved in making such a major step. The dissolution process may seem tedious, but in the long run you will have the peace of mind knowing that the transition was properly handled.

No matter what situation your ministry is in, if you need any type of assistance, I want to encourage you to join us at one of our Ultimate Church Structure Conferences, or simply give us a call at 877-494-4655. Remember, you are not alone!

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