On May 27, 2014, California Assembly Bill No. 1529 (AB 1529), introduced by Assemblyman John Perez, was passed on the Assembly Floor. The goal of AB 1529 is to streamline the process for dissolving nonprofit corporations by creating two new dissolution processes. First, it establishes an administrative process that would allow the Franchise Tax Board (FTB) and Secretary of State (SOS) to dissolve nonprofits that have been inactive for some time. Second, it creates a mechanism for voluntary dissolution of a nonprofit corporation if certain conditions are met.
Administrative Dissolution or Administrative Surrender
In California, there are over 144,000 nonprofit corporations that provide a variety of services and programs. According to the bill’s analysis, some nonprofit corporations have been disbanded or have been inactive for a significant amount of time, but have not been dissolved. These entities continue to incur fees and fines and cause “unnecessary time spent by FTB and SOS staff to proceed through the dissolutions process.” AB 1529 attempts to relieve these burdens by giving the FTB and SOS authority to “administratively clear away the backlog of inactive nonprofit corporations.” Under the proposed law, a nonprofit would be subject to an administrative dissolution or administrative surrender if one of the following occurs:
- The nonprofit corporation’s corporate power are suspended or forfeited by the FTB for period of not less than 48 continuous months; or
- The nonprofit corporation was incorporated in California or qualified to transact intrastate business and has not filed a statement of information (SOI) with the SOS for a period of not less than 48 continuous months.
AB 1529 establishes procedures for providing notice of pending dissolution or surrender to the nonprofit corporation, and allows the nonprofit corporation to object to such action. If the nonprofit corporation timely objects to the dissolution or surrender (within 60 days of the administrative notice), it will have 90 days from its written objection to satisfy all debts and file a current SOI with the SOS. The FTB and SOS can also provide one 90-day extension to the nonprofit corporation to comply.
[Ed. Note that over 74,000 organizations have had their state tax-exempt status revoked by the FTB as of May 16, 2014. But revocation of tax-exempt status does not result in dissolution of the entity.]
The bill also attempts to ease the burden for a nonprofit corporation to voluntary dissolve. According to the bill’s author, “the current dissolution process, which involves winding down of the nonprofit corporation’s affair, is very cumbersome and protracted.” The new bill creates a mechanism for voluntary dissolution of a nonprofit corporation upon certification of certain matters by the entity – a similar mechanism already exists under California General Corporation law, known as a short form dissolution. (California Corporation Code Section 1900.5 ).
Under AB 1529, a nonprofit corporation can dissolve when it has not issued any membership and has filed a certificate of dissolution within 24 months from the date that the articles of incorporation was filed. The certification must also verify the following information:
- The corporation does not have any debts or liabilities.
- The tax liability shall be satisfied on a taxes-paid basis.
- A final franchise tax return.
- The corporation was created in error.
- Distribution of assets.
- No issuance of membership.
- That the corporation is dissolved.
The nonprofit corporation is dissolved once it files a signed and verified certification of dissolution with the SOS. The dissolution does not relieve the nonprofit corporation’s liability to creditors. The bill is supported by the California Society of Enrolled Agents, a professional organization of individuals who have earned the privilege of representing taxpayers before the Internal Revenue Service. The bill is currently in the Senate awaiting review.
Michelle Baker is a San Francisco-based attorney interested in social impact.