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Temporarily Suspending Operations

November 9, 2022 by Michael Simkins

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

  • Don Kramer’s Nonprofit Issues
  • Annual and Filing Requirements, California Franchise Tax Board
  • IRS Publication 557 (01/2022), Tax-Exempt Status for Your Organization
  • Do Bears Really Sleep All Winter?

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DISCLAIMER: Spokes offers informed advice and recommendations, not professional counsel. Blog content is current as of the date shown. Individual posts are not necessarily updated, so please confirm the accuracy of the information, especially of older posts.

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