Understanding Nonprofit Turnarounds, Restructuring, & Wind Downs

NONPROFIT SECTOR CHALLENGES IN 2025

Nonprofit organizations are facing an array of converging financial and operational pressures. Diminished government grants, donor fatigue, rising interest rates, increased personnel and materials costs, and difficulties in recruiting qualified leadership collectively create significant instability. While each of these challenges is not novel in isolation, the simultaneous convergence has left many organizations with limited options—frequently requiring legal and professional intervention in the form of mergers, restructurings, or, in some cases, dissolution.

LEGAL COMPLEXITIES IN NONPROFIT RESTRUCTURING AND DISSOLUTION

Unlike for-profit entities, nonprofit corporations are subject to a distinct statutory regime that varies significantly across jurisdictions. Counsel advising nonprofits in distress must remain mindful of:

• Notice Requirements: State statutes may impose extended notice periods for dissolution. For example, Missouri law requires six months’ notice for identified recipients and up to two years for unnotified parties.

• Disposition of Assets: Most governing statutes and organizational bylaws require residual assets to be distributed to a similar type of entity, often defined by mission and/or geographic scope.

• Classification of Assets: Nonprofit assets are often held in categories such as unrestricted, quasi-restricted, and restricted funds. Each carries different legal obligations and restrictions on use or transfer.

Missteps in these areas can invite scrutiny from regulators, litigation from stakeholders, and potential personal liability for directors or fiduciaries.

STRUCTURAL LIMITATIONS AND COMPENSATION CONSIDERATIONS

For practitioners, one of the foremost concerns in nonprofit insolvency is compensation. Approximately 90–92% of nonprofits operate on annual budgets under $1 million, making the cost of a formal restructuring or wind-down daunting. Counsel may need to consider creative fee structures, court approval of compensation, or arrangements in which an acquiring organization funds the transition.

Additionally, nonprofits often lack robust governance and risk-management practices. Deficiencies in insurance coverage, tax compliance, HR policies, or board training are common. While addressing these deficiencies imposes costs, failure to do so can exacerbate liabilities during a turnaround or wind-down.

TYPES OF ORGANIZATIONS IMPLICATED

When considering nonprofit restructuring, attorneys should recognize that the category extends beyond traditional charities. Entities may include:

·       Educational institutions

·       Religious organizations

·       Charitable foundations

·       Recreational and membership organizations (e.g., golf courses)

Each entity type carries its own statutory obligations and unique stakeholder considerations, underscoring the importance of tailored legal strategies.

WHY THIS MATTERS

For lawyers advising clients in this space and turnaround professionals working in the space, the stakes are high. Mishandling a nonprofit dissolution or restructuring can result in regulatory enforcement actions, litigation from beneficiaries or creditors, and reputational harm to fiduciaries. Ensuring compliance with applicable statutes, carefully documenting decisions, and structuring transactions to respect donor restrictions are essential steps in mitigating legal risk.