You cannot sell a nonprofit business the way you would sell a private company. Nobody owns a nonprofit, so there is no equity to transfer and no owner entitled to a payout. What the organization can do is sell specific assets, merge into another nonprofit, or dissolve and pass its remaining property to another charity or a government body. Each path is legal, each is regulated, and none of them ends with a check going to a founder or director as a sale price.
Why There Is Nothing to Sell
A nonprofit corporation is run by a board of directors who act as fiduciaries. They are stewards, not shareholders. The organization’s assets belong to the corporation itself, and the beneficial interest belongs to the public. Federal tax law bars any part of a 501(c)(3)’s net earnings from benefiting a private shareholder or individual.1Internal Revenue Service. Inurement/Private Benefit: Charitable Organizations There is no stock, no membership interest, and no ownership share. A founder or director has nothing to hand over to a buyer.
The rules against extracting personal value have teeth. Under Section 4958 of the Internal Revenue Code, a disqualified person who receives an excess benefit from the organization owes an excise tax of 25 percent of the excess. If the transaction is not corrected within the statutory window, a second-tier tax of 200 percent applies.2eCFR. 26 CFR 53.4958-1 – Taxes on Excess Benefit Transactions Organization managers who knowingly participate owe a separate 10 percent tax, capped at $20,000 per transaction.3Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions The IRS can also revoke the organization’s tax-exempt status.
Disqualified persons include anyone in a position to exercise substantial influence over the organization during the five years before a transaction. That covers voting board members, the CEO or president, the COO, the CFO, and the treasurer automatically. Founders land in this group too, because founding an organization is one of the facts the IRS treats as evidence of substantial influence, along with controlling a large share of the budget or earning compensation tied to revenue.4eCFR. 26 CFR 53.4958-3 – Definition of Disqualified Person
Selling Assets Instead
The entity is off the table, but individual assets are not. A board can authorize the sale of real estate, equipment, intellectual property, a brand name, client lists, or program-related materials. The buyer can be a for-profit company, another nonprofit, or a government body. The controlling requirement is fair market value. Selling to a disqualified person at a discount creates an excess benefit and triggers the same excise taxes described above.2eCFR. 26 CFR 53.4958-1 – Taxes on Excess Benefit Transactions
Fair market value is normally established through an independent appraisal. To satisfy IRS standards, the appraiser must have verifiable education and experience valuing the specific type of property, hold an appraisal designation from a recognized professional organization or have at least two years of relevant experience, and produce a report that describes the property, explains the valuation method, identifies comparable transactions, and complies with the Uniform Standards of Professional Appraisal Practice.5Internal Revenue Service. Publication 561 – Determining the Value of Donated Property Appraisal fees based on a percentage of the appraised value are not permitted.
Proceeds stay with the charitable mission. If the nonprofit continues operating after the sale, it keeps the money and uses it for its exempt purposes. The board cannot distribute the proceeds to directors, officers, or employees as a windfall. If the organization is winding down, its governing documents must send all remaining assets to another 501(c)(3) or a government entity for a public purpose. That is a condition of tax-exempt status, not a suggestion.
Donor-Restricted Funds Move Separately
Restricted gifts and endowments do not travel with general assets. Under the Uniform Prudent Management of Institutional Funds Act, adopted in some form by the vast majority of states, an organization dealing with a restriction has a few options. The simplest is asking the donor to release or modify it, as long as the fund continues to serve a charitable purpose of the organization; that route needs no court approval. If the donor is unavailable or unwilling, the organization can petition a court to modify a restriction that has become impracticable or wasteful, or where circumstances the donor did not anticipate justify a change consistent with donor intent.
During a sale or dissolution, the board must track each restricted fund separately and confirm that whoever receives it can honor the restriction or has the legal authority to modify it. Donors and state attorneys general both have standing to challenge mishandling of restricted gifts, and this is where transactions frequently unravel.
Merging With Another Nonprofit
A merger combines two organizations without a traditional sale. One nonprofit is absorbed by another, the surviving entity, and all assets, contracts, and liabilities move automatically by operation of law. No cash passes between individuals. The purpose is continuity of mission.
State law generally requires both boards to approve a formal plan of merger explaining how the combined entity will operate and how the merger serves the public interest. The absorbed organization ceases to exist as a separate legal entity. Under IRS Revenue Procedure 2018-15, the surviving organization in a statutory merger keeps its existing tax-exempt status and notifies the IRS of the structural change rather than reapplying.
Employees generally transition to the surviving organization, and their retirement benefits need careful handling. A merger cannot reduce or eliminate protected benefits, including accrued benefits, early retirement benefits, and optional forms of benefit; the surviving organization typically becomes the new plan sponsor and must notify participants of the new sponsor’s name and address.6Internal Revenue Service. Retirement Topics – Employer Merges With Another Company
Dissolving the Organization
If neither a sale of assets nor a merger fits, the third option is dissolution. Before distributing anything, the organization must satisfy its outstanding liabilities. Most states require written notice to known creditors so they can file claims. Only after debts are paid can remaining assets go to another exempt organization.
In an asset sale, by contrast, the buyer does not automatically take on the seller’s liabilities. Liability can still follow the assets in specific situations: when the purchase agreement expressly assumes certain debts, when a court treats the deal as a de facto merger because the buyer continues the same operations with the same staff, or when the sale was structured to defraud creditors. A purchase agreement should spell out which liabilities transfer and which stay with the selling entity.
Who Has to Approve the Deal
Two outside gatekeepers matter here: the state attorney general and the IRS.
In most states, the attorney general oversees the use of charitable assets under the common law doctrine of parens patriae, acting as the public’s representative. Before completing an asset sale, merger, or dissolution, the organization typically must notify or obtain approval from the AG’s office. Some states require a formal application and review period; others require only notice and an opportunity to object. The AG evaluates whether the transaction serves the public interest, whether assets were valued at fair market value, and whether insiders received any improper benefit. The AG may request additional documentation or impose conditions, and a transaction completed without proper AG involvement can be challenged or unwound. Reviews typically take several months.
On the federal side, a nonprofit selling more than 25 percent of its net assets or dissolving entirely must complete Schedule N (Form 990), which tracks significant dispositions of charitable assets. Schedule N asks for a description of the assets transferred, the date, the name of the recipient, and the fair market value. The 25 percent threshold is measured by fair market value, and the reporting requirement applies whether or not the organization received adequate consideration.7Internal Revenue Service. Schedule N (Form 990) – Liquidation, Termination, or Significant Disposition of Assets A fully dissolving organization also files its final Form 990 marked final. Government entities terminating 501(c)(3) recognition use Form 8940.8Internal Revenue Service. Instructions for Form 8940
Any board vote on the transaction has to follow a conflict of interest process. A director with a financial interest in the deal must disclose it fully, leave the room during discussion and voting, and let the remaining members decide whether the transaction is fair, reasonable, and in the organization’s best interest. Independent valuation or competitive bids should exist for any related-party transaction, and the deal should be disclosed in the organization’s audited financial statements. The IRS specifically weighs whether the organization followed proper governance when it decides whether an excess benefit transaction occurred.
Getting Paid to Stay On
Founders and executives who continue working after a sale or merger can be compensated, but the arrangement has to withstand Section 4958 scrutiny. The safest route is the rebuttable presumption of reasonableness, which shifts the burden to the IRS if the compensation is later challenged. Three conditions must be met.
The compensation has to be approved in advance by an authorized body made up entirely of individuals with no conflict of interest in the arrangement. That body must obtain and rely on data showing what similarly situated organizations pay for comparable roles; for organizations with annual gross receipts under $1 million, data from three comparable organizations in similar communities is sufficient. And the board must document the terms approved, who was present for the vote, the comparability data relied upon, and how it was obtained, all prepared before the later of the next board meeting or 60 days after the final action.
Meeting these steps does not guarantee the IRS will agree the compensation is reasonable, but it creates a legal presumption in the organization’s favor that the IRS must affirmatively rebut.9eCFR. 26 CFR 53.4958-6 – Rebuttable Presumption That a Transaction Is Not an Excess Benefit Transaction Skipping any of them leaves the executive personally exposed to excise taxes.
The through-line across all of this is that a nonprofit is a public trust, not a private asset. You can transfer what it owns, combine it with another mission-aligned organization, or wind it down responsibly. What you cannot do is treat it as something you own and sell.