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Temporarily Suspending Operations

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Can a nonprofit hibernate?

One of our smaller nonprofit members recently asked me that question. The organization had formed to raise funds to build and operate a community pool but, as they put it, “hit a wall.” They aren’t ready to give up on their goal, but they need time to regroup and strategize.

The simple answer is perhaps, but there are many things to think about when addressing this issue. In legal terms, a hibernation for a nonprofit is called a “suspension of operations.”

According to Donald W. Kramer, an attorney with more than 45 years of experience dealing with nonprofits, “an organization can suspend its operations for a short period without losing its 501(c)(3) status.” The specific answer for any particular organization comes down to legal and factual issues, and each situation can be unique.

File your reports!

That said, there are some very important things to keep in mind. First and foremost, you still need to file your required reports with the state and federal government. For the IRS, that means your annual 990, whether it be the full 990, 990-EZ, or 990-N. If you should fail to do that three years running, your tax-exempt status will be automatically revoked, and you don’t want that! In California, that also means filing your annual 199 or 199N as well as your Statement of Information with the Secretary of State and annual registration with the Attorney General’s office.

Meet

Your board of directors needs to meet at least once a year. Since your board has said it does not want to dissolve, it should be meeting anyway to plan for the future and how you will resume active operation. Take minutes of these meetings and keep them on file.

Follow your bylaws

Be sure to re-read your bylaws. Going “into hibernation” does not mean you can forget about them. You still need to follow your bylaws. Do they say you will meet monthly? Do they say you elect officers every June? If your bylaws state you will do certain things at certain times, you still need to do those things—or, properly amend your bylaws to allow for your period of temporary inactivity.

Mind your money

Do you have money in the bank? Think carefully about how to manage it while your main activities are suspended. Do you have any ongoing expenses that you will face despite being in hibernation? Are some of the funds restricted and can only be used for the stated purpose for which they were given to you? Be prudent. Make a “hibernation budget.” Keep sufficient funds readily available for any ongoing expenses. Consider putting the rest in a short-term certificate of deposit. Also, be aware that should you end up deciding not to continue but to dissolve, that process involves expenses. It would not be a bad idea to set money aside for that, just in case.

Plan for the “Spring”

We are not talking Rip Van Winkle here. Rip snoozed for 20 years. Your model should be akin to grizzly bears. It’s an annual thing. According to the folks at Yellowstone National Park, “Male grizzlies come out of hibernation in mid to late March. Females with cubs emerge later, in April to early May.” Not only that, while they’re hibernating, bears do wake up and move around inside the den!

So, your organization is not just checking out completely or indefinitely. Get up and walk around the den. Set a goal for when you will resume active work. Figure out your path to full operations and start following it. If that seems like too much to do, then you may really want to consider dissolving rather than “hibernating.”

References

Beyond the Thank You Letter

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We all have some way of thanking our donors formally for gifts to our organizations. It might be an email or a postal letter. But then what? Are you done? Not if you want that donor to make the next gift.

Gillian Cole-Andrews recently shared ideas for making an annual calendar for continuing to engage your donors.

  • January. No one wants to give money in January. Send a “pre-tax letter” that thanks the donor for gifts made during the year, with a total figure of what was given.
  • February. This is the “lybunt” and “sybunt” month. That means you will write to your donors who gave to you last year but not this year, and those who gave to you some year but not this year. Write and thank them.
  • March. It’s “tour month.” Find a way to bring significant donors to see what you do, whatever it is.
  • April. Event month. Well, according to your organization’s calendar it might be a different month, but take advantage of whatever annual event you do to engage your donors in ways that reinforce their understanding of your mission and your work. If you have a big party, make it mean something in terms of what you do.
  • May. This can be your “annual appeal” in contrast to your end-of-year appeal.
  • June, July , August. Can you celebrate an anniversary? Of your organization’s existence? Of a program?
  • October. Send your impact report. Remind people that you exist and what you do and accomplish.
  • November. Tie a solicitation to something happening this month. Thanksgiving? Susan B. Anthony? Military Family Month?
  • December. This is your end-of-year annual appeal.

Certainly you can juggle some of these around or substitute different activities. The point is to create a annual plan for yourself to make donor appreciation and cultivation manageable.

For further reading:

Gifts of Stock

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A donor is interested in making a gift of stock to our nonprofit, but we don’t have a brokerage account. How can we accept the gift?

You may be tempted to wonder why not just have the donor sell the stock and then give the proceeds to the nonprofit. That is certainly an option, but often it is to the donor’s benefit to give the stock itself. For example, if the stock is worth more than when it was purchased, the donor avoids having to pay capital gains tax on the difference—and you get a bigger gift.

If your organization already has a brokerage account, the stock can be transferred directly. If not, you can look into opening one. That’s a particularly good idea if you expect to receive such donations frequently. A stumbling block, however, is that such accounts often have a significant minimum deposit.

If you don’t have a brokerage account and are not in a position to open one, organizations like the Community Foundation of San Luis Obispo County can help you. A charity itself, the Community Foundation can accept the gift, sell the stock, and pass the proceeds to your nonprofit.

This is also a good time to review your gift acceptance policy and make sure it is clear as to whether or not you accept gifts of stock and, assuming you do, what you will do with the gift. Often, it is best to sell the stock the same day it is received. Here are two good resources for more information on this topic:

Beginner’s Tips for Nonprofit Budgeting

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Creating the first budget for your new nonprofit? Or are you a new board treasurer and inherited a budget or budget process that really needs “upgrading?”

Monte S. Meyers, writing in Blue Avocado, provides some excellent, practical tips for involving the right people in the process, creating your budget, and monitoring it once it’s been adopted. Here are just a few examples:

  • Establish a clear budget development process. Who plays what part, and by when?
  • Develop a written set of “budget assumptions”—the information and thinking used to develop the numbers.
  • Use a budget spreadsheet or budgeting app that identifies each of the areas that make up your budget.
  • Be conservative in your revenue estimates.
  • When you can, enter realistic monthly numbers, rather than just dividing a total by 12.

Read Monte’s full article in Blue Avocado.

Do You Owe Sales Tax?

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As a nonprofit organization you may qualify for exemption from paying both federal and state income tax, but sales tax is a different matter. With some exceptions, a nonprofit’s sales and purchases are taxable. In other words, nonprofit and religious organizations, in general, are treated just like other California sellers and buyers for sales and use tax purposes.

For example, one of our local nonprofits held a day-long yard sale. All of the items sold had been donated to the organization for this purpose. Some members of the organization were surprised to learn that they needed to pay sales tax to the State of California based on the amount of their sales that day.

Some other examples:

  • Sales of food, meals, beverages, and similar items under a number of different circumstances.
  • Sales of tickets that buyers will exchange for food, beverages, or other physical products.
  • Sales of booklets, books, pamphlets, etc.
  • Sales of tickets for fundraising events when the ticket price includes amounts for food or beverages.
  • Sales of merchandise in Internet, live, and silent auctions.

Thankfully, the California Department of Tax and Fee Administration has published a guide specifically for nonprofits. Download your copy here.

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