On September 30, 2015, Governor Brown signed into law Assembly Bill No. 557, making amendments to the laws governing dissolution of California nonprofits. The amendments, which will become effective on January 1, 2016, essentially create two new sets of dissolution procedures for California nonprofits: an automatic dissolution process and a streamlined dissolution process.
Automatic Dissolution Procedures
Under the automatic dissolution procedures of AB 557, provisions are to be added to the California Corporations Code sections applicable to nonprofit public benefit, mutual benefit, and religious corporations, as well as to foreign nonprofit corporations qualified to do business in California, providing for the automatic dissolution or surrender of such corporations under certain circumstances. The bill provides that a nonprofit corporation whose powers have been suspended or forfeited by the Franchise Tax Board for 48 consecutive months or more shall be subject to administrative dissolution or surrender.
Prior to such automatic dissolution, the Franchise Tax Board will mail a notice of the impending dissolution to the nonprofit’s last known address and will also send the name of any nonprofit subject to such dissolution to the Secretary of State and the Attorney General’s Registry of Charitable Trusts. The Secretary of State is then required to provide notice of the planned dissolution of such entities on its website for at least 60 days, as well as instructions for how a nonprofit may submit a written objection to the dissolution. If no written objection is received by the Franchise Tax Board within the 60-day notice period, the nonprofit will be dissolved. If a written objection is received, the nonprofit will have an additional 90 days from the date of the objection to cure any outstanding defects with the Franchise Tax Board. The Franchise Tax Board has the authority to extend this cure period for one additional 90-day period, but no longer.
If a nonprofit is automatically dissolved pursuant to these procedures, the liabilities owed to any creditors of the nonprofit and any liabilities of its Directors will remain in place, and the dissolution will not impact the ability of the Attorney General to enforce any liabilities with respect to the corporation or its Directors as provided by law (e.g., for the diversion or misuse of charitable assets). However, the law does provide a process by which a nonprofit’s liabilities for qualified taxes, interest, and penalties owed to the Franchise Tax Board may be abated upon its automatic dissolution.
The automatic dissolution procedures are intended to assist the Franchise Tax Board in clearing its records of nonprofits that are no longer operating, but have not gone through the formal legal process of dissolving. There is some minimal risk that nonprofits not intending to dissolve may be caught up in these automatic dissolution procedures. However, given that a nonprofit must have been suspended by the Franchise Tax Board for at least 4 consecutive years for the procedures to apply, this risk is likely very low. And it is likely even lower since a California nonprofit that failed to file a required return with the Franchise Tax Board for three consecutive years will have had its California tax-exempt status automatically revoked on the date that its third missed return was due (similar to the procedures for automatic revocation of federal tax exemption).
Streamlined Dissolution Procedures
Given the complexity and expense that can be associated with the current process for dissolving a California nonprofit corporation, a streamlined dissolution process is certainly a welcome development. Unfortunately, however, the procedures set forth in AB 557 are available to only a narrow class of nonprofits and are unlikely to change the dissolution process for the vast majority of California nonprofits seeking to legally dissolve.
The streamlined dissolution procedures set forth in AB 557 provide that a nonprofit corporation that has not issued any memberships may dissolve by having a majority of its Directors sign and verify a certificate of dissolution. Once the certificate of dissolution is filed with the Secretary of State, the corporation is dissolved and it is the responsibility of the Secretary of State to notify the Attorney General’s Registry of Charitable Trusts and the Franchise Tax Board of the corporation’s dissolution.
This is certainly a much simpler dissolution process than is currently available to nonprofits. However, this streamlined process may only be used if the Directors are able to state and verify all of the following:
- The certificate of dissolution is being filed within 24 months after the corporation’s articles of incorporation were filed;
- The corporation does not have any outstanding debts or other liabilities, other than tax liabilities, and all existing tax liabilities will be satisfied or be assumed by another individual or entity;
- A final franchise tax return has been or will be filed with the Franchise Tax Board;
- The known assets of the corporation remaining after paying any known debts or liabilities have been distributed as required by law; and
- The corporation was created in error.
These limitations on which corporations may use the streamlined dissolution procedures raise a few questions. For example, what does it mean to certify that a corporation was “created in error”? Is it sufficient that, in retrospect, the Directors feel that incorporating was a mistake, or is this requirement intended to apply only to corporations that were truly mistakenly formed (assuming it is even possible to mistakenly file articles of incorporation)? Also, if a nonprofit corporation is required to distribute all of its assets prior to taking advantage of the streamlined dissolution process, is it required to provide notice to the Attorney General in advance of such distribution of all or substantially all of its assets? If so, this largely defeats any procedural benefits of a streamlined dissolution process and, if not, will there be any oversight to ensure that any assets held by such nonprofits are appropriately distributed to be used in furtherance of permissible exempt purposes? The fact that the streamlined dissolution process is only available to corporations that were formed within the two years prior to their planned dissolution will also make it unavailable to the great majority of California nonprofits seeking to dissolve.
In short, while the automatic and streamlined dissolution procedures set forth in AB 557 are a step in the right direction in terms of dissolving inactive nonprofit corporations and easing the procedural burdens of dissolution, they unfortunately will have little impact on the voluntary dissolution procedures applicable to most California nonprofit corporations.
See the FTB Notice regarding AB 557 here.