Starting a business venture is always an exciting experience, especially when you form an LLC. However, eventually, you may come to the point where you need to close down your business. But how do you do this correctly, ensuring all fees are accounted for?
That’s the topic of this article. Here, we explore what dissolving a Colorado LLC means, why you might do it—perhaps after evaluating the benefits and determining it's time to move on—and how to go about it, including adhering to the requirements set forth in your operating agreement. Read on to learn more about settling your taxes, filing a final periodic report, and ensuring that both single-member LLC owners and those with partners understand their responsibilities in maintaining asset protection during the dissolution process. Additionally, we'll touch on the importance of a thorough business name search as a preliminary step for those looking to venture anew.
Limited liability companies (LLCs) are legal entities protecting members’ assets from creditors should the firm default on its debts. LLCs permit a legal separation between your business and personal assets, forcing banks and lenders to accept losses if they cannot recover debt from your firm.
Entrepreneurs operating sole proprietorships and partnerships can transition to this protective legal entity whenever they want.
The IRS treats LLCs as corporations, partnerships, or sole proprietorships for tax purposes. Therefore, you can retain your existing tax treatment or complete Form 8832 to become an S-corporation or C-corporation.
Dissolving an LLC means ceasing trading and shutting it down as a legal entity. Usually, it involves filling out mandatory paperwork to terminate the company’s status in the eyes of the state.
Stopping trading is insufficient because the IRS assumes that businesses trade continuously. Dissolving an LLC in Colorado is critical because it absolves you of your reporting duties.
Once you dissolve your LLC, the IRS taxes you as an individual. As before, you pay regular income, Medicare, and Social Security taxes. You will no longer need to pay corporation or sales taxes.
Entrepreneurs dissolve LLCs for a wide range of reasons. Many relate to business, but some are personal too.
For some business leaders, dissolving a company is a part of their exit strategy. They wind up their firms when an opportunity disappears and move on to something else. Changes in consumer tastes, technology, or regulations could make a firm non-viable, making closing down the sensible option. Exit strategies are an excellent way to free up capital and avoid long-term losses.
Dissolution is also a valuable strategy for loss-making firms. Entrepreneurs may cut and run instead of grinding their balance sheets into the ground.
Usually, a firm needs to lose money for six months or more before owners close it. However, you may decide your firm isn’t viable sooner, perhaps because of unexpected market conditions or regulations.
Entrepreneurs also shut down startups that fail to take off. For instance, you might have a business idea you’re excited to pursue, only to discover you’re too late to market. Dissolving your Colorado limited liability company eliminates the need to file financial statements and tax returns, reducing costs.
Owners and entrepreneurs sometimes dissolve companies because of mismanagement. They may not trust appointed executives and decide to shut down the firm entirely instead of replacing them.
Mismanagement can also cause poor finances. Again, these can force the closure of the firm.
Certain situations can cause irreparable brand damage, forcing business closure. Faulty products, PR disasters, or criminal activity can all necessitate dissolution.
LLC members can also have disagreements with each other on direction and company strategy. They may even fall out personally. When this happens, it can become impossible for the firm to function. Dissolution is often the only viable option to break a deadlock.
Companies that go out of business may be unable to pay state or federal taxes. In these situations, it is often advantageous for owners to officially dissolve the firm.
Failing to pay taxes more generally may lead to a loss of LLC status. Georgia’s officials may conclude the enterprise is not carrying out its corporate duties.
Failing to follow Colorado state laws can carry similar penalties. Officials may strike your firm off the corporate register and prevent you from operating if you do not take compliance seriously.
Dissolution is also something you can do if you lose interest in your firm or have personal reasons for closing it down. For instance, you might shut down a company if:
You want to pursue a career as an employee
You’re feeling burnt out
You no longer want to comply with LLC reporting requirements
You want to spend more time with family, traveling, or on your hobbies
Lastly, some family businesses dissolve because of succession issues. If parents cannot pass the firm on to their children, they may dissolve it instead of selling it to a private buyer.
Dissolving a Colorado LLC is a little more complicated than many entrepreneurs imagine. Therefore, this section details the steps you need to take. Here’s what to do.
There are two types of company dissolution: voluntary and involuntary. Voluntary dissolutions are a decision to close the firm made by the members. Involuntary dissolutions occur when liquidators move in, shut down operations, and sell your assets on behalf of creditors.
Voluntary dissolutions require you to vote to dissolve your LLC. If you are the sole member of your LLC and have full ownership, you can decide to close it unilaterally. However, if you share it with other members, you will need to get them to sign off on the decision.
Ideally, your company should have guidelines on what can trigger a dissolution (such as the death of a key person). However, you can shut down a firm even if your LLC doesn’t keep official guidelines.
To dissolve a company, you need a majority vote in favor. If the vote passes, keep a record with your firm’s official records.
Some states require you to obtain tax clearance before you dissolve your company. However, Colorado does not.
With that said, you will still need to complete IRS Form 1120 or Form 1120S (depending on your LLC tax structure) and tick the 'final return' box. Doing this informs the federal authorities you are shutting down your business and won’t make any further submissions in the future.
The next step is to file Articles of Dissolution. Colorado lets you do this electronically. The forms you require should be available online under your entity’s summary. Colorado officials may find your business record 'delinquent for failing to file a periodic report' if you fail to file this document.
Articles of Dissolution forms require you to provide various details, including;
The names of LLC members
Details about your company, such as its industry and address
Details of any assets distributed or liabilities paid
Complete these details and then submit the form online.
Colorado LLCs must notify creditors, lenders, and claimants of the company’s impending closure. You must settle all debts before distributing the remaining funds or assets to members.
Creditors have a limited time to submit claims. After the deadline, they can no longer pursue the business entity for funds.
You can still dissolve your company if your firm cannot pay its debts. However, you will not qualify for distributions.
Once you pay the outstanding debt the company owes, the next step is to distribute assets among the members. Businesses typically follow the stipulations set out in their operating agreements. These set out who gets what and in which proportions. You may require a lawyer to ensure the distribution is legal. If you do not have an operating agreement, you need to distribute assets according to Colorado state law.
The last step in dissolving a company is to wind down all other processes. This part includes things like:
Terminating lease agreements with vendors
Notifying supplies of your intention to exit the industry
Terminating employment contracts and paying severance
Putting notices up on your website and premises informing customers you are closed
Canceling contracts and other agreements
Close your business bank account
Inform the IRS that you want to close your Federal Employment Identification Number (FEIN)
Filing for LLC dissolution in Colorado usually takes less than twenty-four hours if you do it online. However, it can take the Secretary of State a few weeks to process all the paperwork.
If you are rushing to dissolve your firm, you should tell the Secretary of State. They may expedite the process for you.
The filing fee for dissolving an LLC in Colorado is $10. You should find all this information on the filing form.
Colorado’s law lets entrepreneurs reopen dissolved firms by filing Articles of Reinstatement. You will then need to file a Statement of Trade Name for each trade name you want to bring back associated with the entity.
Generally, you are not liable for any debts after you file to dissolve an LLC in Colorado. However, there are some exceptions including;