What each option entails

Managing and Preserving Your Legacy: Don’t wait until a crisis or tipping point to begin protecting your history – see Section C

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You’ve made the difficult decision, for the benefit of the community, and are ready to begin the transition.  What are your next steps?

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If you’re restructuring with personnel changes, merging/absorbing, or dissolving: engage professional assistance. Why? An attorney knows the steps, and your particular State’s laws. They are familiar with the processes of your Attorney General and Secretary of State. They can help you project a realistic budget and timeline. And most importantly, they can prevent problems which could be messy, delay things or be expensive. You don’t want to have issues with labor laws, creditors, the IRS, or stakeholders.

 

You may be able to find pro bono or discounted services through Volunteer Lawyers for the Arts; here’s the national listing https://vlaa.org/get-help/other-vlas/

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HR Considerations

Anticipate when you will have problems. Plan ahead so you can do right by your employees.

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Chief executives and Board members will be managing multiple considerations when they decide to close/dissolve, the most important being the organization’s people. Attorney Judy Polacheck of Polacheck HR Law, LLC in Cambridge, Massachusetts, discusses the key considerations in balancing the needs of the organization, and its people in a MassCultural Council’s webinar “Nonprofit Suspension and Closure.” The recording (along with 41 other webinars) can be viewed on-demand https://www.youtube.com/watch?v=5hxmJOlEWmo Here are some of the points she raises as information that may be useful to you. Be aware that this is generic information. It’s not legal advice or guidance on the law. For legal advice, you’ll need to discuss the particular needs of your organization directly with a lawyer.

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Anticipate when you will have problems. Plan ahead so you can do right by your employees.

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The laws generally protect vulnerable workers. Wages, taxes and accrued leave time are important things to pay. Don’t ask employees to delay collecting their pay, don’t make side deals. “In terms of employee relations, you’re asking favors of workers [if you delay payroll] and that’s not the right relationship to be in with your employees,” says Polacheck.

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Know what’s in your current policies and follow them. You may be able to change them, but be wary of break them or changing them without notice. There may be ways to be creative – you may be able to adjust what part time and full time mean. You may be able to reduce hours, reduce pay, demote, make fewer demands, schedule shorter hours. These are unfortunate steps, but “From an employee relations perspective, and an equity perspective, I often find that it’s a humane way to manage a tightening budget with your workers: if you reduce compensation for everybody, then at least everybody gets paid something.” Make all changes in writing.

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Furloughs may allow employees to receive certain benefits for the furlough period. But if your worker is laid off, or furloughed, or not being paid, they CANNOT work for you – even to answer one question!

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If you must terminate people, follow a consistent policy/protocol. You should, again, follow your written policies. You are likely required to pay out their wages, maybe unused vacation, and any reimbursements due the day they’re let go. Be ready to notify them of their COBRA rights and their right to apply for unemployment insurance benefits. Immediately end their access to the organization’s electronic resources (email, servers, online platforms, intellectual property, licenses, etc.)

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When handling separation and severance agreements, Polacheck reminds us to try to “.. do so in a way that’s equitable.” If you pay severance only to your executives, your white-collar workers or your highly compensated workers, you risk transferring more of the organization’s wealth to privileged people at the expense of people with more marginalized identities.

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Get together whatever documents you have to meet with your attorney or HR professional. If you don’t have clear offer documents or pristine personnel files, just bring all you have. What lawyers will really need to review is any documents or messages make promises to your personnel.

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Dormancy/Hiatus

Do:

• Make sure you are currently legally active. You must maintain your nonprofit status. Follow your bylaws to maintain at least your minimum number of active Board members; hold your minimum number of Board meetings; and make your annual filings with your State/Commonwealth/Territory, and the IRS. 

• Budget for all of your ongoing expenses. There are business basics you need to keep going while you’re on organizational hiatus: website/domain maintenance, data backup and security, annual licenses, storage space, email accounts, PO boxes, etc., and have people commit to maintaining these activities during hibernation.

• This might be a good time to digitize all of those old paper files! Get them uploaded to secure cloud storage, AND make sure you have multiple people with the appropriate access and passwords. Check out Section C of this Toolkit, “Managing and Protecting Your Legacy,” for more tips.

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Don’t:

• Distribute or spend down your assets, particularly in a way that’s not aligned with your Bylaws.

• Wait too long. People leave, records get moved/lost, quorums disappear.

• Fear the Attorney General or IRS. Follow the process, don’t hide information, ask reasonable questions, and you should be fine.

• Stay dormant for too long – after several years, your IRS status will be at risk.

 

Fiduciary Duty of Care: Throughout the time you’re merging/shutting down/etc., the Board and officers’ responsibilities continue. Follow general governance best practices: create written records, consider your alternatives before making decisions, vote on Board resolutions approving those decisions, review documents, and get outside advisors if necessary.

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Mergers/Absorptions/Acquisitions

These processes are not quick. In a merger, one organization will remain, and one will cease to exist. A merger can be much more complex culturally than legally. Is there trust and goodwill on both parts? Is it clear and agreed who will be on the Board of the merged organization? Who will be the Executive Director and key staff?

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If you’re actually looking to collaborate on a program, or consolidate/share administrative functions, a merger isn’t necessary. A contractual agreement should suffice.

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Due diligence is the watchword here.

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• Are stakeholders on board with the merger? This is particularly critical with major funders.

• Are both sides aware of existing financial and legal liabilities and debts, and agreed on how to manage them?

• What will the merged organization lose, and can it be shared/distributed with the new organization, or other community partners?

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In a merger, absorption or acquisition, your steps should include:

• Engaging both organizations’ Boards, staff and stakeholders to agree if this is a good fit and conduct financial and governance due diligence

• Agreeing on which organization will continue to exist, developing a plan of merger involving your stakeholders, both organization’s Boards, approval of other individuals as required, and how to handle assets

• Filing articles of merger with the State; making public notice that you’re merging; upon approval, carrying out the formal plan

• Making a public announcement and managing the public relations around the shift

 

Dissolution

This might be the option if there’s no obvious choice of an organization to merge with, or a merger does not make sense for other reasons. A plan and approval to distribute your assets is required.

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Do:

• Review your Bylaws (which should have a clause regarding dissolution and the distribution of assets) and your Articles of Incorporation (which must have a dissolution clause).

• Budget for closing expenses: legal and accounting fees, final bill payments, severance, wages owed, taxes withheld, cancellation penalties, etc.

• If you have a collection, build in time and expense for staff to manage the transition

• Work with an attorney to follow your legal steps – in general, these may include:

  • Obtain Board approval to dissolve and affirm what assets you hold and where they will be distributed. If you can’t identify a home for your assets, talk with your local arts agency or community foundation; they may be able to connect you with an organization with a similar mission

  • Seek approval by any other individuals required legally and in your bylaws

  • File required notice/articles of dissolution with the Attorney General and Secretary of State and/or other authorities

  • Publish a notice so that known and unknown creditors are aware (this should protect you from future liability)

  • Submit your final 990 or form 990-EZ to IRS - due the 15th day of the 5th month after your termination date, marked “Final Return/Termination,” with Schedule N and your articles or plan of dissolution

  • Distribute your assets and pay off remaining liabilities. You want your accounting records to provide a clean audit trail: did you follow your bylaws in approving the process, did you settle all liabilities, did you distribute assets as designated, did you take and record Board votes as necessary?

  • Consider who will maintain custody of organization records. Comply with legal document retention processes and GAAP requirements.

  • Submit final notice to the Attorney General and any other state requirements for notification

• Close all bank and investment accounts

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Don’t

• Spend or distribute your assets before you have your dissolution plan in place, have set aside funds for closing costs, and get Board approval

• Acquire any new debt

• Dissolve, distribute your assets, but not file the final Form 990, or never mark it final

• Close down without some sort of public acknowledgement. See Section C for ideas to announce and celebrate the sunsetting of your organization

 

This information relates to a Judicial Dissolution – when you make the choice to dissolve. If you’ve been administratively dissolved by the State or IRS (due to inactivity or lack of reporting), or if you’re facing bankruptcy due to debt, your process will be different. As always, consult an attorney.

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Collecting institutions and historic properties have special ethical considerations. As with all nonprofit arts and cultural organizations, gifts they’ve received – whether money, or artwork/artifacts – were intended for public benefit, and generally should be transferred to another nonprofit, not sold.

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Sometimes a well-meaning administrator or Board member suggests selling (“de-accessioning”) specific objects or entire collections as part of a hibernation or closure. To help explain why that would be such a breach of professional and community standards, and to help you advocate against the sale, this toolkit https://www.aamg-us.org/wp/wp-content/uploads/2021/07/Toolkit-Draft-Web-7-6-21.pdf provides you with information and arguments. 

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Susana Smith Batista ran the Pasadena Museum of California Art and relates her experience closing it in 2018 in her new book, How To Close A Museum: A Practical Guide

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When A History Museum Closes: Ethics Position Paper from AASLH is a guide for handling these unique assets.

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When the Bead Museum, based in Glendale, AZ, permanently closed in 2011, it found a new home for its collection, and focused the messaging to its stakeholders and the press on its ongoing life. https://www.glendalestar.com/news/article_fb21a9c8-4f12-11e0-88fb-001cc4c03286.html

 

Manage the Message – Don’t create space for rumors and questions. See Section C, Managing and Protecting Your Legacy

 

For more details on what to consider regarding structural change, here are free on-demand webinars (this Toolkit contains information from these sources).

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Protecting Your Assets: Managing Legacy Materials for Performing Arts Organizations 

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The Winding Down series of workshops from the Nebraska Arts Council, February/March 2021

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• Session 1: Discussions and Decisions

• Session 2: Legal and Financial Steps

• Session 3: Leaving a Legacy  

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The Recover, Rebuild, Renew Series of webinars from the Massachusetts Cultural Council includes 42 on-demand recordings, including:

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Nonprofit Suspension and Closure, March 16, 2021

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Nonprofit Mergers & Absorptions, March 23, 2021