LIQUIDATION: LEGAL ISSUES WHEN A CLIENT DECIDES TO … · Liquidation: Legal Issues When a Client...

LIQUIDATION: LEGAL ISSUES WHEN A CLIENT DECIDES TO CLOSE A

BUSINESS

First Run Broadcast: October 25, 2018

Live Replay: February 6, 2019

1:00 p.m. ET/12:00 p.m. CT/11:00 a.m. MT/10:00 a.m. PT (60 minutes)

Planning for an LLC’s eventual liquidation can be as important as formation. Well planned and

efficient liquidations help LLC members preserve value. Messy liquidations are costly and

rapidly diminish value. Whether triggered by a provision in a buy/sell agreement or on the basis

of a statutory provision, liquidations are a process of marshaling assets, providing a variety of

notices, satisfying debts and other liabilities, and eventually liquidating distributions to LLC

members. When planned and managed effectively, the process can preserve substantial value for

clients. This program will provide you with a practical guide to liquidations of LLCs.

• Statutory bases for voluntary LLC dissolution and how they are triggered by members • Judicial/non-voluntary bases for LLC dissolution • Planning for eventual dissolution of an LLC in buy/sell agreements • Process of dissolution, winding up and termination – and practical consequences of each

step • Drafting statements of dissolution • Summary of tax consequences of distributions of various type of property

Herrick K. Lidstone, Jr. is a shareholder in the law firm of Burns Figa & Will P.C. His

practice focuses in the areas of business transactions, including taxation, limited liability

company and corporate formation and organization, mergers and acquisitions, and securities. He

is the author of the Securities Law Deskbook (2006-2016 (CLE in Colorado, Inc.)), Limited

Liability Companies and Partnerships In Colorado (2015-2017, with Allen Sparkman (CLE in

Colorado, Inc.)), and Federal Income Taxation of Corporations (6th Ed., with William Krems

and Richard Robinson (ALI-ABA, 1989)). He has served as an adjunct professor of law at the

University of Denver Sturm College of Law and the University of Colorado School of Law. Mr.

Lidstone earned his A.B. from Cornell University and his J.D. from the University of School of

Law.

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Liquidation: Legal Issues When a Client Decides to Close a Business Teleseminar

February 6, 2019 1:00PM – 2:00PM

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LLC Liquidations – Legal Issues When A Client Closes Herrick K. Lidstone, Jr. Burns, Figa & Will, P.C.

October 11, 2018

Excerpted from Lidstone and Sparkman, Limited Liability Companies and Partnerships In Colorado (CLE in Colorado, forthcoming 2019 edition)

[Note: Citations are to the forthcoming 2019 edition of Limited Liability Companies and Partnerships In Colorado, expected to be published in the first quarter of 2019. Contact CLE in Colorado (https://cbaclelegalconnection.com/) for more information.] [This paper also references sections from Article 7 of the Uniform Limited Liability Company Act of 2006 (last amended in 2013) discussing Dissolution and Winding Up, drafted by the National Conference of Commissioners on Uniform State Laws (located at http://www.uniformlaws.org/shared/docs/limited%20liability%20company/ULLCA_Final_2014_2015aug19.pdf)] Chapter 11

DISSOLUTION, DELINQUENCY, AND REINSTATEMENT

SYNOPSIS § 11.1 DISSOLUTION OF LIMITED LIABILITY COMPANIES

§ 11.1.1—Dissolution Of An LLC § 11.1.2—LLC Dissolution — Filing Requirements § 11.1.3—Winding-Up Process § 11.1.4—Involuntary Dissolution Of LLCs § 11.1.5—Disposition Of Claims Against A Dissolved LLC

* * *

CHAPTER11‐DISSOLUTION,DELINQUENCY,REINSTATEMENT P a g e |2

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11.3 Tax Ramifications of Dissolution

§ 11.3.1—Generally § 11.3.2—Single Member LLC Treated As A Disregarded Entity § 11.3.3—LLC Treated As A Partnership for Tax Purposes, and Partnerships § 11.3.4—LLCs Treated As An Association Taxable As A Corporation (a “C Corporation”) § 11.3.5—LLCs Treated As An S Corporation

* * *

This chapter discusses dissolution of LLCs (§ 11.1) and partnerships (§§ 11.2 and 11.4), as well as a concept that is unique to Colorado, delinquency (§ 11.5). Colorado also provides a method for reinstatement of a dissolved entity at any time after dissolution (§ 11.6).

“Dissolution” occurs variously, depending on the nature of the entity involved, at the

point in time where the business of the entity ceases except to the extent necessary for winding up its affairs. An LLC dissolves “upon the agreement of all members” or as set forth in the operating agreement or if there are no remaining members.1 In a general partnership governed by the Colorado Uniform Partnership Law (CUPL), dissolution is defined as the “change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.”2 This reflects the age-old belief that a partnership is an aggregation of its partners, and a change in the relationships among the partners by one withdrawing would dissolve the old partnership, perhaps creating a new partnership.3 The Colorado Uniform Partnership Act (CUPA), Colorado’s more modern partnership statute, does not define dissolution, but, as we discuss in § 11.2.1, “Dissolution of a Partnership Under CUPA,” provides for dissolution upon agreement of all the partners, as provided in the partnership agreement, and in other circumstances.

1 C.R.S. § 7-80-801(1). 2 C.R.S. § 7-60-129. 3 This is potentially a serious problem under CUPL. In Fairway Dev. Co. v. Title Ins. Co., 621 F. Supp. 120 (N.D. Ohio 1985), the court held that a general partnership was dissolved and a new partnership was formed when two partners transferred their interests to the remaining partner and a third-party purchaser. The title insurer escaped liability because the court held that the new partnership was not the insured under the title insurance policy. See Beat U. Steiner, “Real Estate and Colorado Limited Liability Companies,” 26 Colo. Law. 101 (March 1997). The same issue could arise under CUPL if only one partner resigns.


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CUPL provides for dissolution by judicial action,4 as do CUPA5 and the LLC Act.6 The Colorado Corporations and Associations Act (CCAA) provides for the dissolution of domestic entities at the end of their term of existence7 and following a delinquency,8 provides for notification to creditors,9 and provides the opportunity to reinstate a dissolved Colorado entity following dissolution.10

In all cases, dissolution of an entity does not terminate the existence of that entity.11

However, CUPL and CUPA provide that a dissolved partnership terminates upon completion of the winding-up process.12 When dissolution of an LLC occurs, it proceeds directly to the winding-up phase discussed in § 11.1.3, “Winding-Up Process.” The significant change is that although the LLC “continues its existence,” it “shall not carry on any business except as is appropriate to wind up and liquidate its business and affairs.”13 The LLC Act’s winding-up rules are similar to those applicable to a general partnership unless the partners elect to continue their business after dissolution.14

Immediately following the dissolution of a Colorado LLC, LLP, or limited partnership,

the name of the entity in the Secretary of State’s records will be changed to include the word “dissolved” followed by the month, day, and year of the effective date of dissolution.15 For 4 C.R.S. § 7-60-132. 5 C.R.S. § 7-64-801(1)(e). 6 C.R.S. § 7-80-810. 7 C.R.S. § 7-90-907(2). 8 C.R.S. § 7-90-908, providing a stream-lined dissolution procedure for an LLC, LLP, or limited partnership that has been delinquent for at least three years. See § 11.5.2, “Delinquency.” 9 C.R.S. §§ 7-90-911 and -912. These provisions do not apply to partnerships or limited partnerships. C.R.S. § 7-90-911(4)(b). 10 C.R.S. § 7-90-1001. The reinstatement provisions do not apply to partnerships or to limited partnerships formed under CULPL that have not elected to be subject to CULPA. See C.R.S. § 7-62-1103(1). See § 11.6, “Reinstatement of Dissolved Entities.” 11 C.R.S. §§ 7-60-130 (CUPL), 7-64-802(1) (CUPA), 7-80-803 (LLC Act), and 7-90-910 (CCAA). 12 C.R.S. §§ 7-60-133(1) (CUPL) and 7-64-802(1) (CUPA). 13 C.R.S. § 7-80-803. 14 C.R.S. §§ 7-60-133 (CUPL) and 7-64-803 (CUPA). 15 C.R.S. § 7-90-601.5. The name change upon dissolution does not apply to partnerships that are not


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example, if ABC Company LLC dissolved on September 1, 2019, its name would immediately change to “ABC Company LLC, dissolved 9/1/2019.” This means the name “ABC Company” would, on and after September 1, 2019, be available to another filer. See § 3.1.3 “What Are The Requirements That An Entity Name Must Satisfy?’

Delinquency occurs when, intentionally or not, an entity required to file reports with the

Secretary of State pursuant to the CCAA (a “reporting entity”) fails to file a report. The entity thereafter fails to be in good standing under Colorado law and is restricted in the activities it is permitted to undertake. As we discuss, restoring an entity to good standing and a non-delinquent status is not difficult provided the appropriate fees are paid. Delinquency may, or may not, lead to dissolution.

Reinstatement of a dissolved entity under Colorado law can also easily be done, although

the entity may have lost the right to use its former name, as we discuss in “Entity Name Following Reinstatement” in § 11.6.1.

Under the Uniform Limited Liability Company Act (“ULLCA”) § 709, an entity that is

administratively dissolved may apply for reinstatement only within two years of the effective date of dissolution, as compared to Colorado where there is no time period to apply for reinstatement and the ability to reinstate is not tied only to administrative dissolution.

§ 11.1 Dissolution Of Limited Liability Companies § 11.1.1—Dissolution Of An LLC

An LLC is dissolved upon the consent of all of the members or at the time or upon the

occurrence of the events stated in the operating agreement.16 The operating agreement may, of course, provide for a lesser vote for dissolution or other provisions requiring or permitting dissolution of the LLC.17 An operating agreement may also, for example, require the consent of a third party for dissolution. This is often important for single-purpose entities. See § 9.4, “LLCs as Special Purpose Entities.”

LLPs or to limited partnerships formed under CULPL that have not elected to be subject to CULPA. See C.R.S. § 7-62-1103(1). 16 C.R.S. § 7-80-801. 17 See the provisions for dissolution set forth in § 10.1 of Appendix A, which provides for dissolution upon a vote of three-quarters interest.


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The LLC Act also provides that an LLC is dissolved on the 91st day after the LLC has no members.18 The operating agreement may extend the 91-day period up to one year.19

If the articles of organization establish special provisions for dissolution, they will be

ineffective unless the articles of organization are incorporated in the operating agreement by ratification or otherwise.20

The ULLCA’s requirements for dissolution (§ 701(a)(1)-(3)), are similar to Colorado’s in that it requires an event or circumstance that the operating agreement states as a cause for dissolution, an affirmative vote or consent of all members. ULLCA also provides for dissolution after the passage of 90 consecutive days during which the company has no members. § 11.1.2—LLC Dissolution

Filing Requirements. Upon dissolution, the statute requires the LLC to deliver a

statement of dissolution to the Secretary of State that complies with § 7-80-802 of the LLC Act. This differs from the ULLCA (§ 702(b)(2)), which only suggests delivery of a statement of dissolution to the Secretary of State without requiring it.

The LLC Act no longer requires the filing of a statement of intent to dissolve. The section

requiring a statement of dissolution provides that a limited liability company is dissolved as provided in § 7-80-801, but § 7-80-802(3) states that a person other than a member or manager has notice of the limited liability company’s dissolution for purposes of § 7-80-405 (relating to agency of members and managers) and § 7-80-803.5 (relating to the power of members and managers to bind the limited liability company after dissolution) on the earlier of “(a) [t]he ninetieth day after the limited liability company’s statement of dissolution is on file with the secretary of state; or (b) [t]he date on which such person first has actual knowledge of the dissolution.”21

18 C.R.S. § 7-80-801(1). See § 10.1 of Appendix A, which provides that dissolution can be required by a vote of a three-quarters interest. For a discussion of protecting a negotiated dissolution provision from amendment, see “Amendment Provisions” in § 3.2.6. 19 C.R.S. § 7-80-108(2)(d.5). 20 Arguably, the articles of organization will be a part of many operating agreements. C.R.S. § 7-80-102(11)(a) defines “operating agreement,” inter alia, as “any agreement of all of the members as to the affairs of” an LLC, and further provides that, except as required by a written operating agreement, an operating agreement need not be in writing. If the operating agreement ratifies the filing of the articles of organization or incorporates them by reference, or the members otherwise approve or ratify the articles, for example, in an organizational consent, they should be considered part of the operating agreement. 21 C.R.S. § 7-80-803.5(1) states:

Subject to section 7-80-802(3), a limited liability company is bound by a manager’s act or, in the case of a limited liability company, the articles of organization of which provide that management is vested in members, a member’s act after dissolution that:


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Dissolution Without Filing or Public Notice. An LLC may be a dissolved entity whether or not it has filed a statement of dissolution. Consider, for example, the LLC operating agreement that provides that the LLC is dissolved “upon the sale of all or substantially all of its assets unless continued by a vote of a majority of the Members within 90 days after the completion of the sale.” The LLC then sells all of its assets, but rather than distributing the cash to the Members it acquires a new business and commences operations – all without any Member approval.22 Consider also a two-member LLC for a family business without an operating agreement where mother and father have both passed away – and the children continue operating the LLC without realizing the import of CR.S. § 7-80-801(1)(c).23 In both cases, whether by operating agreement or statute, the LLC in question has dissolved – and no statement of dissolution has been filed and no public notice has been given.

In both cases of the unappreciated LLC dissolution, third parties are entitled to rely on the

authority of managers (or members of a member-managed LLC) in doing business with the LLC until the earlier of “(a) [t]he ninetieth day after the limited liability company’s statement of dissolution is on file with the secretary of state; or (b) [t]he date on which such person first has actual knowledge of the dissolution.”24 Managers (and members of a member-managed LLC) face some risk for LLC actions taken following dissolution that are taken other than in the winding-up process. In both of these cases, other facts may suggest that the parties have amended the operating agreement by course of conduct to eliminate the requirement to dissolve.

Whether or not such facts exist, if the persons in charge become aware of the dissolution

and can obtain sufficient approval from the members, they likely will be able to reinstate the LLC. See § 11.6 “Reinstatement of Dissolved Entities.” An interesting but unanswered question exists when some members determine that dissolution is the better course and oppose the persons seeking to reinstate the LLC. This will likely come down to arguments about continuation of the LLC by course of conduct following the apparent dissolution against the operating agreement and statutory requirements. Where possible, the LLC members and managers should amend the operating agreement to ratify the desired course of action – continuation or dissolution.

(a)Is appropriate for winding up the limited liability company’s business; or (b) Would have bound the limited liability company under section 7-80-405 before dissolution, if the other party to the transaction did not have notice of the dissolution.

22 Likely the Managers simply continued operations in the new business without reading the operating agreement – and the Members likely never objected either. 23 C.R.S. § 7-80-801(1)(c) states that an LLC dissolves by statute “After the limited liability

company ceases to have members, on the earlier of: (I) The ninety-first day after the limited liability

company ceases to have members unless, prior to that date, a person has been admitted as a member; or

(II) The date on which a statement of dissolution of the limited liability company becomes effective

pursuant to section 7-90-304 . 24. C.R.S. § 7-80-803.5(1).


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This could not occur in the corporate context. With one exception, “A corporation is dissolved upon the effective date of its articles of dissolution”25 – meaning that articles of dissolution must have been filed with the Colorado Secretary of State before dissolution of a Colorado corporation could occur or the public must otherwise have notice of the corporation’s dissolution.26

§ 11.1.3—Winding-Up Process

In the LLC Act, § 7-80-803(1) states that after dissolution

[a] dissolved limited liability company continues its existence as a limited liability company but shall not carry on any business except as is appropriate to wind up and liquidate its business and affairs, including: (a) Collecting its assets; (b) Disposing of its properties that will not be distributed in kind to its members; (c) Discharging or making provision for discharging its liabilities; (d) Distributing its remaining property among its members; and (e) Doing every other act necessary to wind up and liquidate its business and affairs.

This language is similar to the winding-up procedures set forth in ULLCA § 702. Presumably, the operating agreement could vary the provisions of § 7-80-803 and could

provide standards and time limits to be followed. An instance in which the members might want to vary this provision is if an LLC has agreed to sell all of its assets for cash, and, upon closing of the sale, the members want to dissolve the LLC and distribute the proceeds (after discharging or providing for any liabilities).27 If there is some reason why it is not advisable to wait until the sale is closed to file a statement of dissolution, the members should be able to provide in the operating agreement that the managers or members will be able to manage the LLC in the normal course through the closing of the sale and any needed period thereafter. The members also may want to consider that the statutory duty of a manger or member not to compete with the LLC, unless varied by the operating agreement, does not apply after dissolution.28 Of course, just as an operating agreement may modify or increase or eliminate duties before dissolution, it could also

25 C.R.S. § 7-114-103(2). 26 The only exception is where the articles of incorporation set forth an expiration date – extremely rarely done, but even then, the articles of incorporation are in the public record and persons dealing with the corporation have at least constructive notice of the corporation’s expiration. C.R.S. § 7-114-102.5(1). 27 See § 11.1.5, “Disposition of Claims Against a Dissolved LLC.” 28 C.R.S. § 7-80-404(1)(c). Under agency law, unless waived or modified, the duty of an agent of the LLC (such as a manager of a manager-managed LLC or a member of a member-managed LLC) continues throughout the agency relationship (including the dissolution and winding-up phase). See § 4.2, “Agency Law — A Common Source of Duties in LLCs and Partnerships.”


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cause the duty not to compete to continue to apply after dissolution as well as, if the members desire, modifying the extent to which other duties apply after dissolution.29

Until 2016, unless provided in the operating agreement, members of an LLC were not

entitled to compensation for assistance in the winding-up process, unlike under CUPA and CUPL.30 In LaFond v. Sweeney,31 the Colorado Supreme Court noted the difference between the provisions in CUPA and CUPL permitting reasonable compensation to partners in the winding-up process, and the LLC Act with no comparable provision. As a result, the court held that the departing member of the LLC in question completed a contingency fee case for the benefit of the LLC in the winding-up process and was obligated to share 50 percent of the fees earned with his former 50 percent member — with no reduction for compensation to the member performing the work due to the large number of hours involved. As amended in 2016 to be consistent with CUPA, the LLC Act provides that, unless the operating agreement provides otherwise:

A member is not entitled to remuneration for services performed for the limited liability company except for reasonable compensation for services rendered in winding up the business of the limited liability company.32

ULLCA § 707 describes the disposition of assets in winding up the LLC similarly. The ULLCA does not address compensation of the member winding up the operations.

29 See § 4.3.3, “Waivers and Explanation in the Operating Agreement.” 30 C.R.S. § 7-64-401(8) of CUPA provides “A partner is not entitled to remuneration for services performed for the partnership except for reasonable compensation for services rendered in winding up the business of the partnership.” CUPL provides similarly in C.R.S. § 7-60-118(1)(f). Notably, the LLC Act did not provide similarly until 2016 when the General Assembly adopted HB 16-1329, which added C.R.S. § 7-80-404(6) to the LLC Act. 31 LaFond v. Sweeney, 2015 CO 3. 32 C.R.S. § 7-80-404(6).


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§ 11.1.4—Involuntary Dissolution Of LLCs Section 7-80-810 of the LLC Act provides for judicial dissolution of an LLC in a

proceeding brought by the attorney general,33 in a proceeding brought by a member,34 and in a proceeding brought by a creditor.35 The circumstances in which the Colorado attorney general may seek judicial dissolution are:

• Where the LLC obtained its articles of organization through fraud; or • The LLC “has continued to exceed or abuse the authority conferred upon it by law.”36

The LLC Act provides that a member37 or a manager may seek dissolution of an LLC “if

it is established that it is not reasonably practicable to carry on the business of the [LLC] in conformity with [its] operating agreement.”38 ULLCA § 701(a)(4) similarly provides .

The Colorado Court of Appeals interpreted the term “reasonably practical” to mean that

“a party seeking judicial dissolution must establish that the managers and members of the 33 C.R.S. § 7-80-810(1) states:

A limited liability company may be dissolved in a proceeding by the attorney general if it is established that:

(a) The limited liability company obtained its articles of organization through fraud; or (b) The limited liability company has continued to exceed or abuse the authority conferred upon it by law.

34 C.R.S. § 7-80-810(2) states: A limited liability company may be dissolved in a proceeding by or for a member or manager of the limited liability company if it is established that it is not reasonably practicable to carry on the business of the limited liability company in conformity with the operating agreement of said company.

35 C.R.S. § 7-80-810(3) states: A limited liability company may be dissolved in a proceeding by a creditor of the limited liability company if it is established that:

(a) The creditor’s claim has been reduced to judgment, execution upon such judgment has been returned unsatisfied, and the limited liability company is insolvent; or (b) The limited liability company is insolvent and the limited liability company has admitted in writing that the creditor’s claim is due and owing.

36 C.R.S. § 7-80-810(1). 37 Whether the LLC is member-managed or manager-managed. 38 C.R.S. § 7-80-810(2).


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company are unable to pursue the purposes for which the company was formed in a reasonable, sensible, and feasible manner.”39 In reaching the conclusion whether it is “reasonably practical” to carry on the business of the LLC, the court of appeals suggested that the following factors should be weighed:

(1) whether the management of the entity is unable or unwilling reasonably to permit or promote the purposes for which the company was formed; (2) whether a member or manager has engaged in misconduct (additionally listed in ULLCA § 701(a)(4)(C)); (3) whether the members have clearly reached an inability to work with one another to pursue the company’s goals; (4) whether there is deadlock between the members; (5) whether the operating agreement provides a means of navigating around any such deadlock; (6) whether, due to the company’s financial position, there is still a business to operate; and (7) whether continuing the company is financially feasible.40

In no case should an attorney think, or allow clients to think, that the judicial dissolution

provisions of the LLC Act are a substitute for or alternative to a well thought-out and well-drafted exit strategy. We discuss what should be considered for a buy-sell agreement in § 3.2.8, “Buy-Sell Arrangements.”

Finally, a creditor may seek to dissolve an LLC where the creditor’s claim has been

reduced to judgment, execution on the judgment has been unsatisfied, and the LLC is insolvent.41 A creditor of the LLC may also seek judicial dissolution of an LLC where the LLC has admitted the creditor’s claims “in writing” and the LLC is insolvent.42

The LLC Act sets forth a procedure for judicial dissolution43 and for the judicial

appointment of a custodian or receiver.44 ULLCA § 703 allows an LLC to rescind its dissolution if certain requirements are met

during the process of dissolution, such as an affirmative vote or consent of each member and

39 Gagne v. Gagne, 2014 COA 127, ¶ 31. 40 Id. at ¶ 35. 41 C.R.S. § 7-80-810(3)(a). 42 C.R.S. § 7-80-810(3)(b). 43 C.R.S. § 7-80-811. 44 C.R.S. § 7-80-812.


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filing a statement of withdrawal or rescission with the Secretary of State depending on whether the dissolution has become effective or not. § 11.1.5—Disposition Of Claims Against A Dissolved LLC

Section 7-80-803(2) states that a dissolved LLC may dispose of claims against it pursuant

to §§ 7-90-911 and 7-90-912 of the CCAA. These sections of the CCAA provide standardized provisions for notices to creditors of dissolved LLCs as well as dissolved corporations, dissolved nonprofit corporations, and dissolved cooperatives formed under Article 56 of Title 7. These standardized provisions do not apply to partnerships or limited partnerships.45

The CCAA provides that a dissolved entity “may” provide notice to persons having

claims in the manner set forth in the statute, thus clarifying that the only consequence of a dissolved entity failing to provide notice to persons having claims is that the dissolved entity will not enjoy the shortened statute of limitations that applies if the statutory notice procedures are followed.46 Note, however, that a manager or other governing person of a dissolved LLC might be liable for causing the dissolved LLC to fail to give the statutory notice if the LLC consequently had to pay a liability it arguably would not have had to pay if the notice had been given. Written Notice to Claimants

Written notice to any person having claims against a dissolved LLC may be given at any time after “the effective date of the dissolution.”47 Prior law required that this notice be given within 90 days of the effective date of dissolution. Section 7-80-802(2) now states that an LLC is dissolved as provided in § 7-80-801; presumably, this date will be the effective date of the dissolution for purposes of notice to persons having claims. The written notice is required to state that, “unless sooner barred by any other statute limiting actions, any claim of that person against the dissolved [LLC] will be barred if an action to enforce the claim is not commenced by a deadline that is stated in the notice, which deadline shall not be less than two years after the delivery of notice.”48 The statute indicates that the dissolved LLC is to deliver the notice.49 Like any other action taken by an LLC, of course, it must act through human agents. If the LLC’s management asks the attorney or another third person to deliver the notice, the attorney or other person should make clear that they are delivering the notice on behalf of the dissolved LLC.

45 C.R.S. § 7-90-911(4)(b), which defines the term “dissolved domestic entity” and does not include any CUPL, CUPA, CULPL, or CULPA partnership entity. 46 C.R.S. § 7-90-911(1). 47 C.R.S. § 7-90-911(2). 48 Id. 49 Id.


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The notice may also contain such other information as the dissolved LLC company determines to include, including information regarding procedures facilitating the processing of claims against the dissolved LLC, but the notice may not impose or imply any obligation on the part of persons having claims against the dissolved LLC that do not exist at law.50

If a dissolved LLC delivers the foregoing written notice to a person having a claim

against it, then, unless the person’s claim is sooner barred by any other statute limiting actions, any claim of that person against the dissolved LLC will be barred unless an action to enforce the claim is commenced by the deadline stated in the notice.51

The process for written notice to claimants is additionally provided for in ULLCA § 704,

and is similar to Colorado law. Notice to Claimants by Publication

The CCAA also provides a permissive procedure for notice by publication to persons

having claims against a dissolved LLC.52 This notice may be given at any time after dissolution. A statutory notice by publication must be published one time in a newspaper of general circulation in the county in Colorado in which the street address of the dissolved LLC’s principal office is or was last located or, if the dissolved LLC has not had a principal office in Colorado, in the county in which the street address of its registered agent is or was last located.53 A notice by publication must state that, “unless sooner barred by any other statute limiting actions, the claim . . . will be barred if an action to enforce the claim is not commenced within five years after the publication of the notice or within four months after the claim arises, whichever is later.”54

Notice by publication provides much less relief than does written notice to persons

having claims against a dissolved LLC. Although written notice provides a two-year period of limitation, if a dissolved LLC publishes a notice by publication, then, unless sooner barred under the provision for written notice to persons having claims or under any other statute limiting actions, the claim of any person against the dissolved LLC is barred unless the person commences an action to enforce the claim within five years after the publication date of the notice or within four months after the claim arises, whichever is later.55

50 Id. 51 C.R.S. § 7-90-911(3). 52 C.R.S. § 7-90-912. 53 C.R.S. § 7-90-912(2)(a). 54 C.R.S. § 7-90-912(2)(b). 55 C.R.S. § 7-90-912(3).


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For purposes of the notice by publication to persons having claims and except where a

claim is permitted to be disposed of under § 7-90-911 of the CCAA, relating to written notice to persons having claims, the term “claim” means “any claim, excluding claims of [the State of Colorado], whether known, due or to become due, absolute or contingent, liquidated or unliquidated, founded on contract, tort, or other legal basis, or otherwise.”56

For purposes of the provision for notice by publication to persons having claims, like the

procedure for written notice to persons having claims, “an action to enforce a claim” includes a civil action and includes an arbitration under any agreement for binding arbitration between the dissolved entity and the person making the claim.57

Notice by publication is permitted under ULLCA § 705, provided that the notice

describes relevant information and states that a claim against the company is barred unless an action to enforce the claim is commenced not later than three years after publication of the notice. Enforcement of Claims

A claim against a dissolved LLC by a person to whom written notice is delivered

pursuant to CCAA § 7-90-911 or who receives notice by publication pursuant to § 7-90-912 may be enforced against the dissolved LLC to the extent of its undistributed assets.58 If the dissolved LLC has distributed assets to its owners in liquidation, the claim may be enforced against an owner.59 An owner’s total liability for such claims will not exceed the value of the assets distributed to the owner by the dissolved LLC, and an owner who is required to return any portion of the value of the assets distributed to such owner is entitled to contribution from the other owners.60

* * *

56 C.R.S. § 7-90-912(4). 57 Id. 58 C.R.S. § 7-90-913(1)(a). 59 C.R.S. § 7-90-913(1)(b). 60 Id.


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11.3 Tax Ramifications of Dissolution § 11.3.1—Generally Dissolution and liquidation of an entity can create tax ramifications varying from minimal to serious, depending on a number of factors. For example, dissolution of a single member LLC treated as a disregarded entity by itself has no tax consequences; where the dissolution is followed by liquidation (other than by simply distributing the assets to the member) of the assets of the entity in the winding up process, the single member will have to recognize gain or loss on the sale of the assets of the entity. Dissolution of a limited liability company treated as a C corporation for tax purposes will involve double taxation resulting from the sale of the assets and the winding up of the business of the entity and then distribution of the remainder to the owners. Note that the following discussion assumes a complete liquidation of an LLC or partnership. Where a dissolution is followed by something less than a complete liquidation, different and equally complex rules apply. A complete discussion of the tax ramifications of the dissolution of a limited liability company or partnership is beyond the scope of this chapter, but a basic understanding is important for practitioners in the area. See § 12.1.10 “Taxation Upon Liquidation/Termination of Partnerships.” § 11.3.2—Single Member LLC Treated As A Disregarded Entity This is the easiest view of dissolution of an entity since, for tax purposes, the entity has been disregarded in any event.61 The entity’s business operations have been treated on the owner’s Schedule C as if a sole proprietorship. Business operations have not been taxed to any person but the owner. Where dissolution of the single-member disregarded entity is followed (as required by the statute) with liquidation and winding up, tax consequences generally result from the liquidation of assets (unless the assets are simply distributed to the single owner). See § 11.1.3 “Winding Up Process.”

61 Except for certain excise taxes, which should not affect the dissolution analysis. a single-member unincorporated entity that is disregarded for income tax purposes is not disregarded for employment tax purposes and certain excise tax purposes. Treas. Reg. §§ 301.7701-2(c)(2)(iv) (1996) (employment taxes) and 303.7701-2(c)(2)(v) (1996) (certain excise taxes). Also, for purposes of the regulations applying to the issuance of non-compensatory options by partnerships, a disregarded entity that has not elected to be classified as a corporation is treated as a partnership. Treas. Reg. § 1.761-3(b)(2). See § 12.1.12, “Non-compensatory Options Issued by Partnerships.”


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§ 11.3.3—LLC Treated As A Partnership for Tax Purposes, and Partnerships.62 Upon complete liquidation of a limited liability company (LLC) classified as a partnership for tax purposes, a distributee member generally does not recognize gain unless the cash and the fair market value (“FMV”) of marketable securities distributed exceed the outside basis in the member’s or partner’s owner’s interest.63 Likewise, no gain or loss is recognized by the LLC or partnership on a liquidating distribution.64 See § 12.1.10 “Taxation Upon Liquidation/Termination of Partnerships.” § 11.3.4—LLCs Treated As An Association Taxable As A Corporation (a “C Corporation”)

The dissolution and liquidation of a C corporation should be considered at two levels: the shareholder level and the corporate level. See § 12.2.6 “Taxation Upon Liquidation – C Corporations.” Whether or not sold, assets in a corporate liquidation are treated as sold at fair market value, resulting in the first level of taxation.

§ 11.3.5—LLCs Treated As An S Corporation

The shareholder consequences of a complete liquidation of an S corporation are a combination of the rules governing partnership liquidations (since an S corporation is a pass-through entity) and a C corporation (since it is a corporation). S corporation shareholders (and members of LLCs treated as S corporations for tax purposes) would be well advised to discuss these rules with their tax advisors before making the decision to dissolve. See § 12.2.7 “Taxation Upon Liquidation – S Corporations.”

62Note that this section addresses the complete liquidation of an LLC as opposed to liquidation payments made to a retiring member or a deceased member's successor in interest. 63 I.R.C. §§ 731(a) and (c)(2). 64 I.R.C. §§ 731(b).

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