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Radical Restructure

 

 

INTERNAL STEPS

Merger

Absorptions and acquisitions are also options.

LEGAL STEPS

Dormancy

 

 

INTERNAL STEPS

Dissolution

Judicial dissolution

Administrative dissolution

Bankruptcy

LEGAL STEPS

Consider Your Options and Their Implications

If you do need to consider a significant structural shift, these are the primary choices:

 

 

You will need a method or tool to help you evaluate your current status. You may have an evaluation process already in place, but if not, here are two resources that you might want to explore.

The “Dual Bottom Line Matrix” was designed by Jeanne Bell and Steve Zimmerman. From their book The Sustainability Mindset, this tool helps you visualize the value of current programs/activities in a fairly quick manner. Here’s a very basic description of their concept.

In their framework, you assess your existing programs and plot them in the matrix. (You can also use it to develop projections for the future.) The X axis = impact, the Y axis = profitability. It allows you to look simultaneously at the mission impact and the financial impact of each program. For example, a free class series for underserved teens that’s filled to capacity may rate high in mission impact, but because it doesn’t bring in revenue it’s low in financial impact. A set of recreational workshops for adults in the neighborhood that is also full may break even, so it’s neutral on financial impact, but doesn’t really move the needle on fulfilling your mission.

As you look at whether your activities are sustainable and achieve your mission, using the Matrix can help you answer questions like:

  • Do we deliver this in an exceptional manner?

  • Is there continued/growing demand for this program?

  • Can we attract new resources for the new environment? (new space, virtual programming, etc.)?

  • What do best case, worst case and most likely scenarios look like?

While it may make sense to have Board members complete the assessment as part of their analysis and decision-making, they must have enough information to do so in a valid way. You need to have hard data and a consistent method to determine the mission and financial impacts: It’s easy to let emotions around favored programs seep in! Staff and informed community members can also be valuable participants.

As you look towards greater diversity, equity, inclusion and accessibility for your organization, this process is a way to include informed and invested individuals who can provide these perspectives. This is of course only a snapshot of the Matrix and how it might be used: you can view/acquire the entire Nonprofit Sustainability book, and download templates including the Matrix and instructions, at http://www.nonprofitsustainability.org/

 

Another scenario-planning tool is the free Navigating Uncertain Times: A Scenario Planning Toolkit for the Arts and Culture Sector  Commissioned in 2020 by The Wallace Foundation and created by AEA Consulting, the resource presents four possible scenarios for our society and the place of arts and culture post-COVID. According to AEA Director Adrian Ellis, “Scenario planning involves looking forward, usually over a long term horizon, to prepare for potential threats and unlock hidden opportunities.” It encourages leaders to think about the future – over the next ten years - in a way that recognizes the volatility, ambiguity and complexity of our environment and offers a process, along with scenario descriptions and worksheets. “By mapping current trends and future uncertainties we can begin to imagine possible futures in a rapidly changing environment,” says Ellis. Again, this description only scratches the surface of this rich resource, so please explore it more fully on your own.

Radical Restructure

During COVID, arts and cultural organizations have made remarkable pivots and shifts. Some have given up their permanent programming spaces, while others carried out successful capital campaigns for new venues. Some have transformed their Boards to attract members who have greater comfort with risk, to bring on new professional skillsets, and to build greater equity and diversity into their governance. Others have seen Board members peel off, distracted by their own challenges. The Aspen Santa Fe Ballet chose to close its professional performing company, and focus resources on their presenting, education and outreach programs, and created a new philanthropic arm, “Aspen Santa Fe Ballet Fund for Innovation in Dance,” which will help support the needs of the field post-COVID.

While transitions of this scale need the shared support of Board and executive staff, they typically don’t change the legal structure of the organization.

Dormancy

Suspending operations – “finding safe harbor,” as Michael Ibrahim of the Massachusetts Cultural Council describes it – can be a good short-term solution. It is particularly suitable for volunteer-run organizations that don’t have to retain, or let go of, paid staff, but it can be made to work in other situations as well. According to Krystal Siebrandt, CPA, CFE and CGMA at HBE LLP, going dormant can be a good idea “in the short term, when there is likely funding down the road, or when you need time to re-create or reinvigorate the organization.”

Don’t hold off on a difficult decision if you can make it. Do the best you can by your people. At the Aspen Santa Fe Ballet, when they decided to disband their performing company, they made sure to release their company dancers before audition season, so that they could find other jobs, and provided generous transition packages and continuation of health benefits.

Going dormant is NOT a good option if your challenges are more embedded. If you’re not doing programs that fulfill your stated tax-exempt purpose, or you’ve been declining for several years – don’t just kick the can down the road. Another common impulse is to “hold on” to your 501c3 status so that a future organization can use it. Stephanie Mattoon, Partner at Baird Holm Attorneys at Law, explains that keeping your tax-exempt status for a potential future use is not advisable corporation isn’t possible. “Your organization’s tax-exempt status is based on your mission and activities, which you’ve communicated to the IRS. Your organization’s tax-exempt status should not be used for a different mission and activities with appropriate notification to the IRS. The best option is to dissolve and distribute your assets to another eligible nonprofit. Refer to Section C, Managing and Preserving Your Legacy

 

Merger/Acquisition/Absorption

When two organizations merge, the merging organization ceases to exist as a separate entity. The first question both organizations need to answer is  “Why?” If you don’t both have the same, clear reason, you don’t want to move forward. A successful merger has to be a mission fit, and a culture fit.

When an organization’s activities are acquired by asset transfer (rather than merger of the entities), that transferring organization (left with minimal/no assets) usually then dissolves.

The legal requirements for each organization are different. Mergers are generally simpler and require fewer legal steps.

You also need to make sure there’s full transparency. Both organizations need to be aware of the others’ liabilities, obligations and assets. View all financial documents, past tax returns, legal documents, personnel obligations – due diligence to assess the opportunities and risks in the merger is critical. Both Boards and your other key stakeholders should be in the conversation. 

 

Dissolution

All board members and corporate officers owe two legal duties to the corporation: the duty of care and the duty of loyalty.

The Board’s Responsibility

Remember that in nonprofit corporations, the buck stops with the board of directors. All board members and corporate officers owe two legal duties to the corporation: the duty of care and the duty of loyalty.

The duty of care requires all board members to act with "reasonable prudence." In practical terms, this means all board members must, at minimum, understand the business of the organization, familiarize themselves with any decisions placed before them and review any materials furnished to them by staff, officers, fellow board members, etc. in advance of voting. Ignorance is no excuse.

The duty of loyalty requires all board members to place the financial interests of the corporation before their own. Nonprofit board members are fiduciaries of the corporation, so their loyalty must be unwavering. Abiding by the duty of loyalty means a director must disclose potential conflicts of interests and abstain from voting on any matters in which the director would receive a direct personal financial benefit (including to friends and family).

Breach of either of these duties can result in liability for the corporation and potentially-- especially in breaches of loyalty--for the responsible director. In the dissolution context, breach could result from voting to dissolve the corporation without conducting any due diligence; transferring the dissolving corporation's assets to a charity in which a board member has a personal financial interest; or even overpaying a consultant. No plan is 100% litigation-proof, but nonprofit boards can significantly mitigate risk by keeping abreast of the corporation's activities and carefully documenting its dissolution process.

Courtesy Luke Blackadar, Arts and Business Council of Greater Boston

If your organization doesn’t see a clear path forward to solvency; if it has lost its ‘oomph,’ its leadership and energy; if it has been overshadowed by other community organizations or activities; or if it has either fulfilled its mission or isn’t able to carry out programming to fulfill its mission, it may be time to sunset the organization. This is never an easy decision.  When your organization decides to consider dissolving, it needs to address:

  • financial and logistical steps

  • ways to support the people involved

  • how the assets will be distributed so that they continue to benefit the community

  • how you’ll manage messaging and closure activities to allow the community to contribute and to celebrate the organization’s history.

 

Section C, “Managing and Preserving Your Legacy,” provides guidance on going through a sunsetting process, working with your community to honor your legacy, distributing your assets, and archiving your history.

DISCLAIMER

The information included in this Toolkit was culled from sources available to the public, with input and review by field and subject matter experts. Every effort was made to present current and correct information as of July, 2021. This Toolkit does not represent legal guidance, and is provided for informational purposes. The author and publisher cannot be responsible for any losses or failures users experience as a result of using this information.

This Toolkit Includes Material From:

The American Association for State and Local History, Amy Schindler/University of Nebraska at Omaha (UNO) Libraries, Arts Advisory Board, Association of Academic Museums and Galleries, Bancroft Library/University of California at Berkeley, Beth Kattelman/Jerome Lawrence and Robert E. Lee Theatre Research Institute at Ohio State University, BlueAvocado.org, Christopher Hochstetler/Stuhr Museum, Deborah Gilpin/Madison Children’s Museum, Deloitte, Edgepoint, the Glendale Star, Greg Hunter/Council of Nonprofits, Harvard Business Review, the Insurance Institute for Business and Home Safety, Jean-Phillipe Malaty and Tom Mossbrucker/Aspen/Santa[MQH1]  Fe Ballet, Jeanne Bell and Steve Zimmerman/Nonprofit Sustainability, Judy Polacheck/Polacheck HR Law LLC, Krystal Siebrandt, HBE LLP, LaRue Allen/Martha Graham Dance Company, Leigh Grinstead/LYRASIS, Michael Ibrahim and the MassCultural Council, Mindtools, Oral History Association, Performing Arts Readiness, Stephanie Mattoon/Baird Holm Attorneys at Law, Stephanie Plummer and the Nebraska Arts Council, Susana Smith Batista, Voice of Witness, the Wallace Foundation and AEA Consulting. Thanks to Beth Kattelman, Claire West, Deborah Gilpin, Leigh Grinstead, Lynn Dates and Stephanie Plummer. Special thanks to Jan Newcomb/NCAPER, and Tom Clareson, Performing Arts Readiness project. Design by Lynn Dates.