Author: Jeannie Carmedelle Frey, Community Economic Development Law Project
Last updated: December 2004

(Chapter 1 of Guide to Dissolution of Illinois Not For Profit Corporations)

Dissolution Defined 
Reasons for Dissolution 
Distinction between Dissolution and Liquidation 
Distinction between Dissolution and Bankruptcy 
Kinds of Dissolution: Voluntary and Involuntary
 

Dissolution Defined

Dissolution means the end of a not for profit corporation's existence as a legal entity. Once dissolution occurs, the corporation is no longer permitted legally to enter into contracts or otherwise operate, except for taking actions necessary to "wind up" the company's affairs.

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Reasons for Dissolution

Not for profit corporations may be dissolved for many reasons. "Voluntary" dissolutions, meaning those initiated by a controlling majority of a not for profit corporation's board or its members, may become necessary in circumstances such as the following:

A long-standing corporation may find that it is steadily losing members or revenues. Other corporations may have emerged that perform substantially the same function as the corporation, and it appears that the market either doesn't need or won't support multiple institutions. An arts organization highly associated with its founder finds itself unable to function or attract interest from donors and audiences after the founder dies or retires. A newly-formed corporation may find that it is unable to attract sufficient donors or board members to assure the successful start-up of the proposed organization. Not for profit corporations may also be dissolved by administrative act of the Secretary of State or by court action initiated by creditors, individual corporation directors or members, or even the corporation itself.

 

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Distinction between Dissolution and Liquidation

Dissolution is a legal process that is accomplished either through the corporation's filing of Articles of Dissolution (after satisfying other requirements under the Act), action of the Secretary of State in an administrative dissolution, or judicial action usually initiated by an outside or minority party with respect to the corporation. Dissolution constitutes the "death" of the corporation as a legal entity. In contrast, liquidation is a process involving the corporation's assets, and entails converting to cash or other "liquid" form any of the company's assets that are not readily distributable to creditors or other parties qualified to receive a distribution of company assets. Liquidation may occur prior to a corporation's final dissolution, or after dissolution as part of the "winding up" process.

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Distinction between Dissolution and Bankruptcy

Bankruptcy is a formal, court-supervised process by which a corporation will be reorganized or liquidated, and the corporation's outstanding debts will be paid (in whole or in part) in accordance with the priorities provided in the federal Bankruptcy Code. Bankruptcy under Chapter 7 of the federal Bankruptcy Code involves liquidation of the corporation's assets and results in the termination of the corporation's operations. Bankruptcy under Chapter 11 permits the corporation to reorganize after working out a plan of reorganization, subject to approval by creditors and the bankruptcy court.

Unlike for-profit corporations, nonprofit corporations cannot be forced into bankruptcy by creditors. However, nonprofit corporations can elect to declare bankruptcy. In some cases, such "election" is a result of pressure imposed by a substantial creditor. In other cases, a nonprofit organization may elect to declare bankruptcy, as opposed to dissolving, in order to avail itself of certain protections afforded debtors under the Bankruptcy Code, such as the automatic stay against lawsuits or collection actions that might otherwise be commenced against the organization, or bankruptcy court procedures that permit the efficient handling of a large volume of claims. Moreover, if the directors and officers of a not for profit corporation believe that it could operate profitably in the future if existing debts were able to be discharged (such as in the case of certain debts that were the result of unusual or "one-time" events), reorganization through a Chapter 11 bankruptcy should be considered.

Although the significant costs of a bankruptcy proceeding tend to recommend against a small, not for profit corporation declaring bankruptcy rather than undergoing a voluntary dissolution, bankruptcy may offer advantages to larger not for profits having significant assets, a high number of outstanding claims and/ or multiple threats of creditor lawsuits.

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Kinds of Dissolution: Voluntary and Involuntary

Illinois not for profit corporations may be dissolved in two ways: (1) voluntary dissolution effected by corporate representatives (including by application for court-ordered dissolution); or (2) involuntary dissolution effected by actions initiated by governmental or private persons representing interests opposed to the continued existence of the not for profit corporation. The different kinds of voluntary and involuntary dissolution methods are described below in Sections II and III. Section IV provides a brief overview of dissolution-related requirements and recommended procedures in connection with other local, state and federal laws.

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