Nonprofits change shape over time, through mergers, affiliations, restructurings, and eventually, for some, dissolution. These transitions carry legal requirements beyond what a for-profit business would face, largely because charitable assets can’t simply be redirected at will. This post covers the major transition points and what they require.
Table of contents
When does a nonprofit merger or affiliation make sense?
Mergers and affiliations often emerge from funding pressure, program overlap, or a strategic decision that combined operations will better serve a shared mission. Unlike a for-profit merger, a nonprofit combination has to account for how each organization’s charitable assets and mission restrictions carry forward, and regulators may have a review role depending on the states involved and the size of the organizations.
The due diligence process for a nonprofit merger looks at governance history, outstanding liabilities, grant restrictions, and whether either organization’s tax-exempt status could be affected by the combination. Getting this review right before signing anything protects both organizations’ missions and their boards.
What does restructuring involve?
Restructuring can mean anything from creating a new subsidiary, to converting a program into a separate entity, to reorganizing under a parent-affiliate structure. Each of these carries its own governance and tax considerations, particularly around maintaining tax-exempt status across the resulting structure and properly documenting the relationship between entities.
Organizations considering restructuring should map out not just the immediate change but how it affects existing grant agreements, contracts, and any donor restrictions tied to specific assets. A restructuring that looks clean on an organizational chart can create unexpected complications if these are not addressed up front.
What is the process for dissolving a nonprofit?
Dissolution generally requires board approval, and sometimes membership approval depending on how the organization is structured, followed by formal dissolution filings with the state. The IRS must also be notified through a final Form 990.
A requirement unique to nonprofit dissolution is the distribution of any remaining assets. Unlike a for-profit business, a dissolving nonprofit generally cannot distribute its remaining funds to its founders or board members. Remaining assets must instead go to another tax-exempt organization consistent with the dissolving organization’s mission, a rule rooted in the same private benefit restrictions that govern the organization throughout its life.
Why does the transition process matter for board members?
Organizations sometimes assume a transition, whether dissolution, merger, or restructuring, is primarily an operational decision. But an improperly handled transition can leave board members exposed to lingering liability, particularly around unresolved obligations, unpaid vendors, or improperly distributed assets that a state attorney general later scrutinizes.
The earlier a board engages with legal counsel during a transition, rather than treating it as a formality to finalize later, the more control it retains over outcomes and the fewer complications arise afterward. This is true whether the organization is merging with a peer, restructuring internally, or winding down entirely.
Jova Law guides boards through mergers, affiliations, restructurings, and dissolutions. Learn more about our Nonprofit Mergers, Restructuring & Transitions practice.