I’ve been a shareholder in a small business where we decided to part ways and dissolve the LLC. I’ve never been through a divorce. However, dissolving an LLC is probably similar – it can be contentious and fraught with disputes. Or, it can be an opportunity for those involved to realize it’s not working and allow everyone to pursue something else. The Small Business Administration estimates that 50% of new small businesses close after 5-years. It’s projected that half of the Fortune 500 companies on the S&P 500 will be replaced in the next decade. Business break-ups are common and there are provisions in the law when the owners can’t even agree if the LLC should be dissolved.
In Colorado, an LLC can be dissolved voluntarily by an affirmative vote of its members. Usually the operating agreement includes the mechanism and procedures for accomplishing the dissolution. A statement of dissolution (here is the form) is filed with the Colorado Secretary of State and the LLC continues its operation while it winds up its affairs. The LLC must dispose of its assets, arrange for payment of obligations and debts, and make sure any tax obligations are paid.
If the members of the LLC do not agree on dissolution, there is a provision under Colorado law that allows a member of the LLC to sue to have the court dissolve the LLC (C.R.S. §7-80-810). The statute seems to make it relatively easy to meet the burden for judicial dissolution of an LLC:
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.
While it sounds simple enough, it’s not. Because judicial dissolution of an LLC is an “extreme” measure, courts in Colorado look at several factors to determine if the requirements of C.R.S. §7-80-810 are met including: (1) whether the management of the LLC 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; (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. Gagne v. Gagne, 338 P.3d 1152, 1160 (Colo. App. 2014).
Generally, disagreements between the members may not be enough to judicially force the dissolution of an LLC. However, if significant and fundamental disagreements regard the management and direction of the LLC or other factors that undermine the business of the LLC, a lawsuit to dissolve the LLC may be considered by a court.