Alameda County
Bar Association

Dissolution of Inactive California Nonprofit Organizations, Part 2 

As explained in Part 1 of this series, recent changes in the law have expanded the ways in which some inactive nonprofit corporations can voluntarily dissolve or be administratively dissolved. These dissolutions offer the possibility of an abatement of prior year state franchise tax, interest, and penalties. These provisions of AB 557, which have been codified in the California Corporations Code and the California Revenue and Taxation Code, are intended to streamline the process of dissolving a nonprofit.

This recent law addresses the problem of several hundreds, maybe thousands, of inactive and suspended California and foreign nonprofit corporations sitting on the state’s books.  Many of these nonprofits were abandoned years ago, have lost their tax exempt status through failure to file required annual reports, and have been accruing California’s minimum franchise tax of at least $800 every year, in addition to penalties and interest. Many want to dissolve but do not have the funds to pay prior year taxes. AB 557 provides three new dissolution options to inactive nonprofit corporations.

This three-part article will cover the three approaches to nonprofit dissolution under AB 557:

  • voluntary dissolution and abatement of back taxes;
  • administrative dissolution; and
  • short form dissolution.

We turn now to the second option.

Administrative Dissolution
Section 5008.9 of the Corporations Code subjects any California nonprofit public benefit, mutual benefit, or religious corporation, and any nonprofit corporation qualified to transact business in California, to administrative dissolution if the FTB has suspended the corporate powers of the nonprofit for a consecutive period of 48 months. The process looks as follows:

  • The FTB sends a notice to the last known address of the nonprofit in the records of the FTB.
  • The FTB also sends the name and corporate entity number of the nonprofit to the California Secretary of State and the California Office of Charitable Trusts.
  • The Secretary of State lists the nonprofit on its website as a nonprofit subject to pending administrative dissolution and provides instructions for the nonprofit, if desired, to send a written objection to the FTB. This listing serves as 60 days’ notice of the dissolution.
  • If the nonprofit sends a written objection within the 60 day period, the nonprofit has an additional 90 days to pay or satisfy all accrued taxes, penalties, and interest and to file a current Statement of Information with the California Secretary of State. The nonprofit will be eligible for one additional 90 day extension. Once payments and filings are made, the dissolution will be cancelled.
  • If the nonprofit does not send a written objection within the 60 day period, or does not pay the applicable amounts within the allotted time period, the nonprofit will be dissolved. The Secretary of State will issue a dissolution certificate.

As part of the dissolution, the nonprofit’s liabilities for its past due annual $800 minimum franchise tax, interest, and penalties are abated. However, the nonprofit’s liability to creditors and the liability of nonprofit directors or other related parties will not be discharged. The California Attorney General will continue to have authority to enforce liabilities of the nonprofit and its directors and officers.

Check out tomorrow’s blog for Part 3: short form dissolution.

About the Author: Cameron Holland, a member of the ACBA Business Section’s Executive Committee, has a specialty in the representation of nonprofit organizations. Visit her website for information about her practice and more updates and tips on legal issues affecting nonprofits.