May 15, 2011 | Read Time: 4 minutes
Instead of working on ways to stay in business, some financially stressed nonprofit groups should consider another idea, experts say: closing shop.
Crippled by weak fund raising, cuts in government support, investment woes, and other fallout from the recession, many charities have already taken severe survival steps, like cutting programs and staff, to stay alive. Now, say charity officials and observers, some of those groups should confront the alternative to hobbling along in a tough fiscal climate: offering their assets—cash and programs—to a kindred organization and folding before nothing is left to salvage.
“Charities by nature seem to have a difficult time closing down before the inevitable,” says Peter Goldberg, president of the Alliance for Children and Families, in Milwaukee, a national association of human-service organizations. “It is emotionally painful, requires time, effort, and a certain level of risk. It is a distraction from the everyday mission of providing much-needed services. Unfortunately many charities thus opt, perhaps subconsciously, for the slow ride to oblivion rather than to more proactively confront looming reality.”
Losing Effectiveness
Making plans to close before a financial crisis forces such a move would be especially smart now, the experts say, because many already weakened charities are likely to be hit by deep government spending cuts in the coming months.
If they don’t close at an opportune time, says Bob Ottenhoff, chief executive of GuideStar, in Williamsburg, Va., which collects information on charities, many nonprofit groups run the risk of being “hollowed out.”
“We have all these organizations that are figuring out some way to muddle through, while they are losing their ability to be effective,” he says.
In surveys conducted by GuideStar over the past two years, 8 percent of charities have reported that they are in “imminent danger” of closing because of financial reasons, but no data exist to indicate how many of those groups, or others, have actually closed.
Many groups that do shut down do so quietly, without relinquishing their federal tax-exempt status or reporting their dissolution to state regulators. Some of the defunct groups may be revealed later this year when the Internal Revenue Service is expected to rescind the charity status of organizations that for three consecutive years have failed to file an informational tax return—which could total as many as 320,000 organizations.
‘Natural Selection’
Mr. Goldberg is not surprised that so many charities may simply fade away, making cut after cut until, he says, “Friday comes and they just can’t meet payroll.”
But he and other charity leaders and consultants say that such winnowing of the nonprofit field wastes charitable assets and is an unhealthy way to determine which organizations live or die. They say it would be better to transfer successful programs to other charities that can better manage them.
Paul Light, a New York University professor of public service, predicted in 2008 that 100,000 nonprofit groups would fail within two years. Today, he says, America still has too many charities. (New data from the IRS puts the number in the United States at nearly 1.3 million.)
But, he adds, culling the field through what he calls “natural selection” leaves vulnerable too many small, but effective and essential, groups.
“Organizations need to get out of the mode of protecting their own donors, their own identity, their own legacy, and look more broadly at what’s best for the whole community,” Mr. Light says. “These are desperate times, and all groups, the strong and the weaker ones, need to be thinking more strategically and creatively about protecting programs and services and assets through restructuring, mergers, acquisitions, thoughtful downsizing, and, yes, closing with a thoughtful, proactive plan when that makes the most sense.”
Dissolving ‘Affirmatively’
Closing should not be equated with abandoning an organization’s mission or with failure, nonprofit experts say. A charity’s services may be unnecessarily duplicating other efforts, or the group may have simply outlived its mission or succeeded in accomplishing it. Financial distress may result from poor planning or lack of expertise, but more often extenuating circumstances, such as a bad economy or government cutbacks, are to blame.
In any case, says Gene Takagi, a California lawyer who advise charities, nonprofit groups that plan for a timely closing are more often avoiding, not courting, failure. “You can better advance your mission or preserve your work and the legacy of your work if you make the decision to dissolve affirmatively rather than waiting it out and being backed into a corner,” he says.
See the Related Content on this page for a handful of charities that have recently ceased operations and demonstrate the varied experiences nonprofits face as they confront closure.
