Prior to consolidating NPCs, the boards of directors of both nonprofits should consider some of the different types of mergers and consolidations.

• A merger involves integrating the programmatic and administrative functions of two or more organizations. Mergers occur when one organization becomes part of another organization. [Nonprofit A merges with Nonprofit B. All assets and liabilities of Nonprofit A are transferred to Nonprofit B. Nonprofit B assumes assets and liabilities.]
• An administrative "consolidation" is a restructuring that includes the sharing, exchanging, or contracting of administrative functions to increase the efficiency of one or more of the organizations involved. [Nonprofit A and Nonprofit B come together to form a new Nonprofit C. Assets and Liabilities of both Nonprofits A and B are combined and assigned to Nonprofit C. Nonprofit C must apply to the IRS for tax-exempt status as a new entity.]
• An asset transfer and dissolution occurs when Nonprofit A transfers all of its assets to Nonprofit B. Nonprofit A remains responsible for paying off all liabilities and divesting itself of all obligations. Nonprofit A subsequently goes through the dissolution process.

When the decision of the board involves merging or consolidating two or more organizations, the boards of directors must approve the transformation as well as the implementation process. The board of any surviving or subsequent organization should conduct a due diligence review of the other organization(s) prior to making a commitment. This requires full disclosure of all assets and liabilities through a thorough review of the other nonprofit’s:

• Financial status including audit reports, tax returns and supporting documentation
• Contracts, leases and agreements including industry sponsored agreements, grants, employment and consulting contracts, etc.
• Financial performance (actual budget vs. projections)
• Minutes from board and committee meetings
• Actual and potential liabilities (i.e., possible disgruntled employees; actual, pending or threatened legal or tax liabilities)
• Compliance with federal and state laws including those regarding human resource management (i.e., FLSA, ERISA, etc.)
• Range of activities and staffing

This due diligence process involves considerable effort, but is necessary to ensure that the parties are aware of all possible liabilities. A nonprofit should also contact its insurance broker to ensure continuing coverage during the transformation process. Extended coverage (known as “tail” coverage) should be obtained to cover liabilities that may come to light as long as three years after the change in status.

If a board decision results in the need for dissolution of an NPC, the process must be conducted in accordance with the regulations of the state in which the NPC was incorporated, along with appropriate notifications. See below for recommended steps to take toward dissolution of an NPC.

1. Review NPC’s bylaws and articles of incorporation (or charter) for guidance on the steps necessary to obtain board approval for dissolution. The bylaws may require a unanimous or supermajority vote.
   
   
2. Follow the state process for dissolving a nonprofit. (Note: A Medical Center Director may order the dissolution of an NPC based on a determination that it is no longer serving the interests of VA [Handbook 1200.17 and 1400.2, section 10. b.] However, such a dissolution must be accomplished in accordance with state requirements.) For guidance, go to National Council of Nonprofit Associations http://www.ncna.org/ to obtain the contact information for the association of nonprofits in your state. Legal assistance from an attorney familiar with state nonprofit requirements is recommended to guide an NPC through the dissolution process.
   
   
3. Liquidation and distribution of assets must be conducted in accordance with state regulations. Often, the secretary of state will appoint a supervisor who may require all assets to be held in trust pending distribution in accordance with the bylaws. The organization will continue to exist until all pending obligations have been met, but may not conduct any new business.
   
   
4. Carefully assess and address all outstanding obligations. This may include:

• Paying taxes
• Notifying creditors, PI's, employees, consultants, funding organizations, sponsors, grantees, etc.
• Closing asset accounts including bank and brokerage accounts
• Canceling contracts (i.e., leases, insurance, etc.)
• Collecting amounts owed to the nonprofit
• Arranging for the transfer or termination of any ongoing research studies or educational activities. Address any issues related to retention of research records.

5. Notify the IRS by sending a letter to EO Customer Account Services

Internal Revenue Service
TE/GE Customer Account Services
P.O. Box 2508
Cincinnati, OH 45201

When filing the last Form 990 or 990 EZ, check the Final Return box in the header area on page 1 of the return.

6. Upon reaching a board decision to dissolve and at least thirty days prior to dissolution, notify the VA NPC Program Office in the Office of Research and Development, the Office of Academic Affiliations, and NAVREF. Upon completion of the dissolution process, provide the VA NPC Program Office and OAA with the final date of dissolution and state documentation.