The current economic climate has forced many nonprofit arts organizations to confront underlying issues. Tensions mount, dollars are scarce, and unresolved weaknesses or fissures often grow. We have seen heartening examples of artists, donors, audiences, and funders rallying to support the art and organizations that they love. In some cases, streamlined, more focused organizations are forging ahead with renewed determination. But in other cases, the economic downturn may herald the time to close the doors.
Discussions of arts organization closures invariably include terminology and expressions that parallel those we use regarding the end of life. Dignity. Honor. Respect. Grace. Fear. Compassion. Courage. Ritual. Mourn. Celebrate. These are strong words that remind us of the intensity surrounding the closing down of an arts organization.
Conversations with arts funders and organization staff members reveal some fundamental and distinct dynamics regarding life span and life cycle issues for arts organizations. For some otherwise-healthy arts organizations, the retirement or death of a founding artist means the loss of a centripetal force and heralds closure. But other organizations that close have usually been in trouble of one sort or another for a while. This may be due to diminishing community support, a lack of need for the organization's mission, or shifts in the environment or audience interests. Additionally, the changing demographics of a neighborhood or developments in new technologies and behavior patterns, or exhaustion and burnout, can portend closure. The recession is unlikely to be the full cause of a closure scenario even though the challenges of adequate funding in this financial downturn are certainly not illusory. As one funder puts it “trees with deep enough roots won't fall over.” The economic climate is making some of tis root system more visible.
For the past few decades the health of arts organizations has been measured in terms of growth and sustainability. Today we are reassessing both the wisdom of growth and the meaning of “sustainability.” It is useful to keep in mind that our current 501(c)(3) nonprofit structure (with its assumption of corporate life in perpetuity) is a recent historical constructabout fifty years old. It is also instructive to note that the average lifespan of a Fortune 500 company is just 40 years,1 and that only 44% of small businesses survive for four years or more.2 This is valuable context for examining both the issues and the logistics of closure for arts organizations.
Closure can vary from careful intentionality to chaotic dysfunction. Some of the best-known organizational closures are those that occur with the retirement or death of a founding artist, such as the carefully constructed plans for Merce Cunningham's Legacy Plan and Trust, now set in motion with his recent death. The decision to close is ideally arrived at through thorough examination of all options, including dissolution, dormancy (see below), merger or other forms of association. Mergers have been a topic of much recent interest in the funding community, though there is increasing realization that the challenges of a merger are legion. Indeed, merger may essentially amount to a form of closure through the subsuming of one organization by another.
Adequate deliberation and exploration of options is essential, and input from trusted colleagues and advisers is warranted. Without that, we find examplesespecially with small and fragile organizationswhere expediency has trumped careful consideration, and a board may have jumped to closure decisions prematurely. In other situations, there is often a great deal of fear at exploring the issue at all. Board members are reluctant to have an organization fold on their watch. It can often appear easier to defer the situation in the hope that future boards will grapple with problems, even if the writing is on the wall.
There are fundamental differences to closure situations: An aging artistic founder presents a different scenario than a major institution in financial peril, or a smaller arts organization experiencing burnout. The scale of the organization and the length of its existence are significant factors in the complexity of closure discussions and decision making. A long-standing institution with substantial facilities, permanent collections of artworks, or extensive set and costume holdings faces different challenges from a five-year old nonprofit that has sublet space and whose primary asset is the creative thinking of its staff. Budget size and the depth of an organization's infrastructure suggest differing levels of formality and flexibility, as well as varying stakes related to assets and liabilities.
All of this presumes that closure is a voluntary rather than an involuntary action. Nonprofits have historically filed for dissolution under state laws, but federal bankruptcy courts are seeing more nonprofits recently and frustrated creditors can force an arts organization into bankruptcy.3
Organizations may consider filing for Chapter 11 reorganization to buy time for financial or operational reorganization, or for Chapter 7 bankruptcy if there is no chance of coming back from the brink. If an organization enters bankruptcy, then a court-appointed bankruptcy trustee may manage liquidation of property and other aspects of dissolution. This inevitably puts the organization's leadership at a greater distance from controlling the process and the legacy.
An organization may be thought of as closed but may live on in a state of dormancy, hibernation, or, as one funder put it, “induced coma.” This might be seen as a kind of “Sleeping Beauty syndrome,” where the dormant organization awaits the princely kiss of a donor or foundation grant, or some other form of reawakening. While there are examples of intentional dormancy to permit time for artistic rejuvenation and organizational reassessment, such in-between states often appear to result from a lack of completion of the legal requirements for dissolution.
Laws vary by state, but usually an organization can continue on inactive status by filing minimal reports with the state and the federal government.4 If an organization fails to officially follow its state's dissolution process, it becomes essentially a “ghost” organization. The danger here is that others might try to seize their shell or website; the directors or officers have a continuing fiduciary responsibility if it has not been officially dissolved.
It is important to be clear whether an organization is in a suspended, inactive state intentionally or because of lack of energy, inability to clear debts, or lack of information on dissolution. If an organization has intentionally induced dormancy, there must be provisions for appropriate oversight (e.g., a functioning board) and reporting requirements for the duration of this state. It is also advisable to create a mechanism to revisit the decision annually to assess future steps.
Closure of an arts organization can send ripples far and wide. Staff, contract artists, board members, and volunteers often feel the impact most directly, but relationships with donors and audiences extend into the larger community and the field. When an orchestra dissolves, musicians leave and that reduces access to music lessons for children or accompanists for dancers or choirs. When arts organizations rally to honor the tickets of a failing organization, it builds goodwill and support for the arts in the community. Conversely, if an organization closes in confusion and audiences feel they've been left hanging with unused tickets, this can erode confidence in other arts organizations and make ticket or subscription purchases feel like a shaky investment.
The value of honoring staff, current and past board members, and other volunteers cannot be overestimated. It is likely that these individuals will resurface in the arts community; reputation and relationships are valuable assets. Breaking the news of intended closure to staff isunpleasant but being clear and honest about the dissolution process and staff roles and options is critical. Recognizing staff, paying severance to employees (within legal bounds and financial capacity), and providing retirement benefits to those who have devoted a lifetime of service are all important considerations. Job placement or career transition services can also be valuable. There may be opportunities to hand off artist contracts to other organizations to mitigate loss of income for artists.
The stress and burden of closure lies especially heavily on staff leadership during closure. The support of trusted advisors, including funders, can be invaluable in making the process less lonely and more carefully considered.
The period leading up to and including actual closure represents a time of unique possibility to tell the story of an organization. This is a moment for gathering the experiences of those who have been an integral part of its history, and to preserve the organization's knowledge and legacy for those who come after. No organization hopes for anything other than a positive collective memory and, with care, this threshold moment can be one of meaningful acknowledgment and celebration.
Farewell events, memorial services, wakes, farewell tours, funerals, and other vehicles have all been used in distinctly idiosyncratic ways to honor an organization's accomplishments and traditions, and to burnish its reputation. Showcasing the organization's artistic work is central in most celebratory events as is inclusion of a broad spectrum of players, from artists and administrators to supporters and audiences.
The experiences and abilities of a defunct organization are often re-plowed back into the community through the individuals who carry this knowledge with them into new arts-related ventures. Continuing access to artistic archives, however, is key in ensuring that an organization's legacy can be built upon. Most organizations are eager to find ways to try and make a gift of their history to the field to enrich those who follow, but this is more easily said than done. Some communities are fortunate in having appropriate and welcoming archives such as college and university libraries or, for example, the San Francisco Museum of Performance and Design. But for many organizations, there are few options for how to ensure access to their history. There is much interest in web archiving but, to date, such efforts rely largely on the interest and ability of the closing organization, with a limited likelihood of long-term maintenance.
There is no shortage of ideas on how funders might help with end-of-life issues for arts organizations. Here, in no particular order, is an array of possibilities and questions
that may warrant further consideration.
There are few safe havens for an organization's leadership to talk about the potential of closure. There are examples of a trusted funder playing a key role as a confidential advisor, though the boundary between sounding board and catalyst is murky. Regardless, organizations that enter the closure process with the support of a funder appear to increase the odds of having an orderly end. How might funders provide “closure counseling”? Might public funders, whose funding method reimburses for public benefit rather than investing in future benefit, be best positioned for such a role?
There is little agreement on whether a struggling organization should broach the subject of potential closure with a funder or await an offer of help. There is understandable concern that a funder's door might close to the organization, or that it might jeopardize future requests associated with those artists and administrators and board members who were part of an organization that closed. How might funders test ways to change behaviors for both funders and grantees so that all parties would be more willing to talk and explore? Would boards feel absolved of guilt? Would fear subside?
One might imagine the need for a fund to support sunsetting efforts at every major foundation. San Francisco Foundation's Nonprofit Transition Fund was recently created to help underwrite costs for various efforts including dissolution (both voluntary and involuntary), bankruptcy/reorganization, or closure costs. It is now in its second year of providing grants, though not many arts groups have been recipients to date. The Andrew W. Mellon Foundation and the Nonprofit Finance Fund both provided lead gifts for the Merce Cunningham Foundation as part of its Legacy initiative. Foundation staff may face board resistance to funding closure costs. One funder notes how hard it may be to sell a board on funding the paying off of debt obligations. Some foundations are more likely to support consulting that will assure that a facility they supported will transition to a similar use, but might step away from archiving fees or other costs of the closure process itself.
Empirical research, real life experience, and common sense all concur: A carefully considered and strategic approach to closure is critical if an organization is to retain a desirable level of control and create an orderly process. A formal dissolution planning document that outlines tactics and a timeline for closure will contribute greatly to a respectful process. Dissolution is seldom quick. It might be two years or more from initial discussions to actual dissolution. When handled with careful intentionality, dissolution can bring positive closure and an enduring legacy.
The following points outline the key logistical components of dissolution, with the caveat that it in no way takes the place of appropriate legal counsel. Each organization is unique and dissolution, like an organization's operations, reflects the distinctive character of that organization.
1. The governing body of the organization must reach agreement and record the authorization to dissolve.
The board vote must be recorded appropriately since it will be required in the dissolution process.
2. Designate a leader and an implementation team for overseeing the closure process.
This may be a board committee or a combination of board and staff. These individuals should be involved in creating a closure plan document, with timelines and critical dates (including closing the doors and employee termination dates) as well as assigning tasks to implement the closure.
3. Identify and engage professional assistance either as part of the team or as consultants.
Legal and financial expertise is most critical, especially since dissolution requirements include state-specific regulations in addition to federal regulations. Communications consulting may also be desired.
4. A formal filing of the intent to close is required with the state licensing department or secretary of state.
The requirements vary state by state, and the official filing may take the form of Articles of Dissolution and/or a Notice of Intent to Dissolve.
5. Designate one, or at most two, spokespersons for communication with external and internal stakeholders.
Information management is advised since rumors can run rampant at such times. Identify all individuals, groups, and entities that need to be informed (members, donors, funders, audiences, suppliers, etc.) and clarify the appropriate method of communicating with them. Direct all relevant communication inquiries to those designated, while providing talking points to all board and staff for informal conversations. It is also appropriate to remind board and staff of confidentiality issues.
6. Identify all the assets of the organization.
This should include a physical inventory of real property and equipment as well as consideration of the potential value of less-tangible assets such as intellectual property, the organization's name, domain names, web sites, donor or audience lists, copyrights, licensing, or trademarks. Assets in the form of a donor's bequest or future gifts may be of particular challenge in carrying out the donor's intention. Holdings of donated or intended gifts of works of art may have specific stipulations that should be identified. Programs may also be seen as assets, and it may be possible to pass on a specific program, along with related staff, to other organizations. Restricted funds, including grant contracts, may require renegotiation or discussion with the source at as early a date as possible
7. Liabilities and outstanding obligations must be identified, paid, satisfied, or other provisions made, as possible.
These include contract obligations with individual artists, consultants, suppliers and other parties, debts, and leases. Special care must be taken with obligations related to insurance contracts and benefit plans. Employment and contract relationships should be examined carefully to ensure that obligations are handled appropriately; legal advice may be required to avoid any missteps in this arena. Payment of outstanding obligations places employees first in line, followed by taxes, and then any unsecured creditors. It is important to try to pay any and all outstanding local, state, and federal taxes in advance of legal dissolutionand payroll tax in particularto avoid possible liability for directors and officers.
8. It may be worthwhile to explore “run-off” insurance policies.
Such policies provide coverage for any continuing legal liability following dissolution (as per varying state laws) including directors and officers liability policies. It is important to understand the statutory limits for third parties to bring suit and to plan accordingly.
9. The assets of a nonprofit (those items held in charitable trust) are required by law to be transferred, donated, or “disgorged,” to another charitable entity.
This transfer must meet IRS standards and any applicable state laws. Nonprofit by-laws are theoretically required to clarify the distribution of assets in case of dissolution by an organization, though this is not always the case. Most arts organizations seek to transfer assets to other organizations in an allied line of creative work. This intent is often shared by the organization and its funders who want to ensure that a building, art works, or major equipment whose acquisition they supported continues to serve the community in a similar way. Other assets, including the organization's name, internet domain name, and intellectual property assets (such as copyrights, trademarks, published materials, research, methodologies, licensing, etc) are much harder to generalize about and often murkier to assign value for transfer. Lack of clarity regarding ownership and authorship with artistic works can be especially fraught.
10. Storage of records can be required for up to twenty years, though most records can be held for much less time.
Nonprofits must comply with records retention laws, so it is important to check with appropriate counsel regarding specific state statutes of limitations as well as federal retention requirements. It is critical to establish the location for storage of required records as well as who will hold the responsibility for access and any storage costs. For most arts organizations it is equally critical, if not legally required, to identify where artistic and programmatic records will be archived.
11. Final financial statements and returns must be filed, and some organizations may require a closing audit.
Final W-2 forms are due to all employees, and bank accounts must be closed. The IRS requires that it be given notice of dissolution or merger.5
Lee Bruder, “Nonprofit Dissolution: What to Do When Closing the Doors.” The Nonprofit Quarterly. Spring 2009.
Facts about Terminating or Merging Your Exempt Organization, IRS Publication 4779. May 2009. http://www.irs.gov/pub/irs-tege/p4779.pdf
Fieldstone Alliance. “The Nonprofit Decline and Dissolution Project Report: Going out of Business: Why, When and How to Do It Gracefully,” 1991. http://www.fieldstonealliance.org/client/client_images/pdfs/nonprofit_decline_report.pdf
Harder + Company Community Research, “Partnering with Nonprofits in Tough Times: Recommendations from the San Francisco Community-Based Organizations Task Force.” April 2009. http://www.sff.org/about/whats-new/documents-whats-new/04.24.09 CBO Task ForceReport Final.pdf
Joe Kluger and Thomas Wolf, “Mergers and Strategic Alliance” in Sounding BoardPerspectives on Nonprofit Strategies from WolfBrown. Volume 25, 2009.
Robert H. Levin, Attorney at Law. “How to Dissolve a Maine Nonprofit Corporation,” http://www.nonprofitmaine.org/documents/HowtoDissolveaNonprofit.pdf
Jan Masaoka, “Closing Down the Right Way,” on Board Café, January 13, 2009. http://www.blueavocado.org/content/closing-down-right-way
Jan Masaoka, “Thinking the Unthinkable: Maybe We Should Shut Down,” on Board Café, September 14, 2008. http://www.blueavocado.org/content/thinking-unthinkable-maybe-we-should-shut-down
Ron Mattocks, The Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength. Wiley, 2008.
Merce Cunningham Dance Company, The Legacy Plan http://www.merce.org/p/living-legacy-plan.html
Amy Rogers Nazarov, “Death with Dignity: Ethical Considerations for Museum Closures,” Museum. July-August 2009.
Robin Oppenheimer, “Visions and Hindsights: Seattle's and/or Alternative Art Space 19741984,” A Closer Look/Hidden Histories, published by NAMAC, 2005.
San Francisco Foundation's Nonprofit Transitions Fund http://www.sff.org/about/whats-new/nonprofit-transitions-fund-launches-to-support-intentional-change/
“Small Business Exit Strategies,” on Small Business Notes.com http://www.smallbusinessnotes.com/operating/leadership/exitstrategies.html
Statement of Financial Accounting Standards No. 164, Not-for-Profit Entities: Mergers and Acquisitions, Financial Accounting Standards Board. http://www.fasb.org/
Those who have had the occasion to go though an intentional and orderly closure of an arts organization speak of it as an amazingly meaningful experience, much as many of us might refer to the experience of helping a loved one die with dignity and minimal pain. The passion, love, and commitment that are part of working in the arts are in evidence. An organization often dies much as it lived, reflecting its unique characteristics, strengths, and foibles.
Our system presumes that nonprofits will live forever. Today's environment provides an opportunity to look at this unquestioned notion of immortality. The issue of closure is inextricably connected to the current structures for nonprofit arts activity in our country. This may well be the dynamic moment in which we can reconceptualize or reorganize the nonprofit structure to a more nimble and flexible form. Are we to provide the nectar of the gods to assure eternal life for all organizations, or might we explore more earthly and human (and humane) approaches to the final stage in the life cycle of an arts organization?
The information provided here should not be considered legal advice and it is recommended that legal counsel be sought regarding specific situations and questions.
Many thanks to the following for sharing their experiences and thoughts on this topic: Janet Brown, Executive Director, Grantmakers in the Arts; Ruth L. Eliel, Executive Director, Colburn Foundation; Anne Focke, former Executive Director, Grantmakers in the Arts; Marc Goldring, Associate Principal, WolfBrown; Jim Kelly, Director, 4Culture; John Killacky, Arts and Culture Program Officer, The San Francisco Foundation; John McGuirk, Arts Program Director, The James Irvine Foundation; John Orders, former foundation grantmaker; Tommer Peterson, Deputy Director, Grantmakers in the Arts; Frances N. Phillips, Program Director, Arts and the Creative Work Fund, Walter and Elise Haas Fund; Holly Sidford, President, Helicon Collaborative; and staff and board members of numerous arts organizations in conversations over many years.