By-Laws Question - Team Dissolution

[Tristan Lall]

Basically, this issue comes down to whether the team is a separate legal entity (e.g. an incorporated non-profit under 26 U.S. Code §501(c)) or is legally considered part of something else (e.g. part of the 4-H organization, the school board, or a partnership among team members).

If your team is legally separate, then the property and debt belong to the corporation. However—and this is the big reason why corporations exist—the officers of the corporation have limited liability with regard to debts and contracts. (The big exception being that criminal activity carries full liability.) As FIRST teams go, there are a few that have gone the route of registering under §501(c)3. As I understand it, they usually do this for the autonomy it grants them, because it means that they can isolate their finances and day-to-day operations from the school board. If you want to dissolve one of these, you'll need to plan for dealing with any debts before passing out the assets to team members. And there might well be tax implications if a team member receives some asset from the corporation.

If you're part of the school board, you can probably take advantage of their §501(c) status. But depending on your particular situation, and especially if you use their funds to pay for your expenses, all of your stuff probably belongs to them. So if you dissolve the team, the board is supposed to inherit it all. (Don't go giving out stuff that isn't yours!)

If the team is basically an informal club, then you have few restrictions. But there's one huge catch—the officers of the club bear full liability for pretty much everything. Forget to pay for something? The creditor could file a lawsuit, and the officers of the club will personally end up as respondents (rather than only if negligence is alleged, as is the case with a corporation).

I'm not familiar with 4-H's organizational structure, so I don't know which of those scenarios best approximates what you've got. Hopefully you can clarify—would you be able to give some more details of your associations with 4-H (e.g. at national/state/county levels), the school boards and the responsible adults?

There's actually another scenario that has come up with FIRST teams, but which probably doesn't apply to you: the sponsor thinks that because they give the team money to build robots, that they own the robot (and/or other assets). I'm of the opinion that this is largely without merit, absent a contract that states this—there's no expectation of tangible return when you make a donation, so the sponsor is not entitled to anything. It doesn't hurt to make this distinction explicit in your bylaws—basically distinguish a donation (free money) from a contract (money in exchange for goods or services).

Please note that I can only speak in generalities, because my experience in these issues is mainly with organizations within Canadian public universities, and your situation will surely differ. In particular, there's a whole set of rules governing American non-profits that impose stringent obligations and restrictions on the scope of your activities. If you want to go the route of becoming a standalone non-profit, you're going to want to consult with a lawyer—on a pro bono basis, hopefully. (This post is not intended to be anything but a starting point for your research.)

[DaveF]

I lead a robotics 4-H club and team that competes in both VEX and FTC. I would suggest talking to you county and/or state 4-H staff about this. I know in our state (MD) there are procedures on how funds and equipment are handled if our club were to dissolve. More than likley any rule your county or state 4-H office has in place would over-ride your bylaws.

[Trying to Help]

Thanks everyone for your suggestions!

Katie, I do like your idea about donating leftover parts to neighbor/friend teams.

DaveF, it's not that simple. I'll pm you.

Tristan, thanks for taking the time to write that really long post. I've got a lot to learn about 4-H still and I've spent a year as a 4-H leader.

4-H started before 501(c)3 designations were given out so it's a little confusing. But the government has ruled that we are a non-profit, so we're all set there. Our club has a specific non-profit EIN. There are times, as I found out this year, that we have to use a different EIN for certain grant requests and we use one that is tied to the university.

We have no corporate sponsors at the level that might want to claim a robot; this year the funding is looking particularly grim. So, that's not a worry but it is good to know about.

Again, no school board, no conflict there.

I'm not sure about the limited liability for debts and property because we're not a 501(c)3 organization nor a for-profit corporation. Last year, the mentors dug into their checkbooks and paid for the unfunded portion. We're trying very hard to come up with more funding this year.

I'll keep working on this!

Thanks again,

Trying to Help

[Tristan Lall]

I did some research, and apparently the IRS recognizes the national or state 4-H organization under §501(c)3, but the individual chapters—like yours—are incorporated separately and benefit from the charitable status without having to file all the paperwork. So you're getting the best of both worlds: support from a major nonprofit, which handles the legal heavy lifting with regard to charitable status, and significant autonomy within the local chapter (which is incorporated independently as a non-profit).

If mentors donate things to the non-profit (money or gifts), it's probably tax-deductible for them in some form. That has the dual effect of giving the mentors a break on costs, and establishing explicitly that the non-profit owns the stuff (no question of whether they're borrowing it).

I also found some more comprehensive advice about dissolution of non-profits: here and here. They confirm my suspicion that upon dissolution, the non-profit's assets will be taxed if distributed among team members. (To avoid diversion of assets with an "exempt purpose".)

Also have a look at the Nonprofit Good Practice Guide, especially this.

[Trying to Help]

Thanks Tristan!

This will definitely help. You're not studying law, by any chance? Or non-profit management?

I do appreciate the information.

Trying to Help

[Akash Rastogi]

If you have any non 4H 501c3 questions, I could help out. PM if you need anything. We've been 501c3 since '97

[Trying to Help]

Originally Posted by Akash Rastogi

If you have any non 4H 501c3 questions, I could help out. PM if you need anything. We've been 501c3 since '97

Thanks for the offer. I'm sure that at some point in time, I'll run into another question. So far the most confusing one this fall was with regard to using our EIN or the university's but I suspect that was a combination of the particular non-profit and our 4-H status.

Overall, if there are any groups considering starting the process to become a non-profit, I think they should look into 4-H. There's a huge overlap between FIRST and 4-H when it comes to goals. And I've learned a lot (and I sure I have plenty more to learn) about 4-H this year. It's definitely not just about sheep and chickens.

Trying to Help