Not-for-Profits and Charities – Facing Reality: Is it Time to Wind Down?

The current economic environment, exacerbated by the ongoing Covid crisis, has placed many businesses of all sizes, including not-for-profits and charities, in precarious, if not seemingly hopeless operational positions. How does one know whether to keep up the fight, or whether it is time to execute a planned wind down? What will our ‘new normal’ look like and how do we plan for it? It’s important to know that NFPs do have options, and with the right advice, NFPs can successfully navigate these challenges.

Board Duties in Times of Crisis

When faced with critical decisions impacting the future viability of a charity or NFP, a Board has certain fiduciary responsibilities to the organization, its membership and the public. These include:

• Obtaining factual information and documentation regarding the organization’s financial situation, including current contracts with employees and suppliers, insurance policies, and details of any potential or outstanding claims or debts owing
• Using this and other factual information to analyze whether the costs of remaining in operation outweigh the costs of winding down (a cost-benefit analysis) or vice-versa
• Considering any viable alternatives to winding-down, such as:
  • reduction in staffing, programs, services, and leaseholds
  • alternate sources of funding, including government Covid assistance programs
  • whether the NFP’s programs and/or services could be transferred to another NFP in the short or long term, or implementation of priorities delayed
  • options for other reductions in costs including rent or mortgage holidays, entering into space-sharing arrangements, or moving programs and services on-line
  • putting the NFP into ‘inactive’ status for a period, in accordance with CRA requirements

Moving Forward

When considering these alternatives, start from a position of transparency, putting all stakeholders on notice that the NFP is facing a crisis. Consider creating a task force of members, stakeholders and subject experts to help the Board objectively and strategically identify and analyze available options. It is essential that there be clear and frequent communications to staff, volunteers and clients or service recipients, who should all have a voice in this process.

If the decision is made to find ways to carry on, but in a ‘new reality’, keep in mind that this can bring about many positive opportunities, including the ability to grow rather than reduce programs and services; bring fresh new faces to the Board; have access to new subject experts; potentially reduce competition for donations; reduce overhead on a long term basis; and increase the NFP’s voice and influence. Often, crisis situations can lead to positive opportunities for change.

If the decision is made to become ‘inactive’ or wind-down, there are numerous steps to be followed to ensure compliance with legal and CRA requirements, and it is essential that a NFP obtain financial, tax and legal advice to make good decisions in the interests of the public, the organization, and to limit any future liability.

Pink Larkin has a team of lawyers knowledgeable in all aspects of NFP operations, governance and relevant law.  Let us help you through these challenging times. Visit our Not For Profit practice group page for more information about the services our lawyers can provide to charities, not for profits and professional regulators.