Dissolving a Sole Proprietorship
When you’re the sole owner and operator, coming to a decision to dissolve the business may not require the formal participation of others, but you certainly need to take into consideration family and loved ones who may depend on the business. Once you reach the decision to dissolve, however, there are steps to follow:
- Take care of all outstanding payables and receivables
- Notify your creditors and request letters of confirmation that all your obligations have been met
- Cancel your fictitious trade name (if you have one) and also your business license and seller’s permit
- Cancel your lease and insurance policies in writing
- Close your business bank account and cancel any business credit cards
- File one last Schedule C (for your business) on your annual personal income tax return and check the “Final” box
- Maintain your business records for four years should the IRS come calling
Dissolving a Partnership
In addition to the concrete steps mentioned above, you need to visit the website of the Secretary of State (SOS) and complete the necessary form for dissolution. Search the site for the form that corresponds to your type of partnership, whether it’s a General Partnership, a Limited Partnership (LP), or a Limited Liability Partnership (LLP) — which is different from a Limited Liability Corporation (LLC) — in structure and legal requirements.
An LLP, for instance, must have a managing partner who is liable for all decisions made by the partnership. An LLC can be formed and consist of a single individual, while an LLP must have at least two partners. LLCs are governed by an operating agreement, LLPs by a partnership agreement.
Dissolving an LLC
If you’re operating a Limited Liability Corporation (LLC) in Colorado, the decision to dissolve must be made according to provisions in the operating agreement — usually by some sort of vote — or by unanimous consent by all members of the LLC. You then must file a statement of dissolution with the Secretary of State.
Under Colorado’s LLC Act, you must then do what is called “winding down” the business, which includes:
- Prosecuting or defending any ongoing legal actions
- Settling disputes
- Discharging LLC obligations and liabilities
- Collecting all LLC properties
- Disposing of LLC properties that will not be distributed to members
- Distributing remaining LLC property among the members
An optional action, but one which helps limit legal liability, is to send a notice of dissolution to all creditors and/or publish a notice in a local newspaper. The written notice gives the creditors two years to make a claim, and the newspaper notice gives them five years.
Dissolving a Corporation
Except for tax payments to the IRS, dissolving a traditional corporation and an S corporation is pretty much the same. A traditional corporation pays taxes through the corporation, an S corporation through its individual members.
The dissolving of a corporation is governed by Colorado’s Business Corporation Act (BCA). The decision to dissolve must begin with the board of directors, who (after deciding on dissolution) must set a vote on the decision by shareholders at a meeting. The board must give the shareholders at least 10 days of advance notice of the meeting. An alternate method sometimes available is to hold the vote by mail. Generally, a simple majority vote is all that is needed, but that depends on what the articles of incorporation require (which may vary).
Though it is not specifically required by the BCA, filing articles of dissolution with the Secretary of State can provide further legal protection. Similar to dissolving an LLC, a dissolving corporation should give written or published notice to creditors of the dissolution, with the identical two- and five-year windows for claims. Also similar to an LLC, winding down must also be accomplished in basically the same manner as the LLC.
A July 2020 law now allows for shareholders to purchase other shareholders’ shares if a dissolution occurs. This law applies only to corporations and not to LLCs or partnerships.
Why You Need a Skilled Business Law Firm
At the Law Offices of Daniel T. Goodwin, our attorneys have both the knowledge and experience to guide you through any legal or internal challenges to your business, including pending dissolution. Sometimes if partners cannot agree on dissolution or other matters, then negotiation or even mediation may be called for. If that’s the case, we can help you reach the optimal joint decision. In any event, to help make sure you meet all your legal obligations and wind down your business correctly, you’re going to need the help of experienced business dissolution attorneys.