How to Change From a Corporation to a Sole Proprietorship

By Elizabeth Rayne

As your company progresses, you may decide that you would be more successful with a different business structure. Corporations are responsible for a number of taxes, fees and filing requirements that sole proprietorships are generally able to avoid. However, converting business structures is essentially a process of dissolving the corporation and creating a new sole proprietorship. You should carefully consider whether the tax consequences and the time commitment are worth changing your business structure.

As your company progresses, you may decide that you would be more successful with a different business structure. Corporations are responsible for a number of taxes, fees and filing requirements that sole proprietorships are generally able to avoid. However, converting business structures is essentially a process of dissolving the corporation and creating a new sole proprietorship. You should carefully consider whether the tax consequences and the time commitment are worth changing your business structure.

Step 1

Vote to change the business entity of the corporation. Changing the business entity is a major decision, and must be voted on by the corporation's board of directors and shareholders. The corporation's bylaws should determine the number of votes required to make the decision.

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Step 2

File dissolution documents with the state. Specify the dissolution date on the forms. Generally, the forms must be filed with the secretary of state in the state where the corporation does business, and there is usually a filing fee.

Step 3

Liquidate the corporation's assets and pay off all of its debts. The sole proprietor has the option to purchase the assets of the corporation, such as inventory, customer lists, trademarks, or leases. However, the corporation's debts and dividends must first be paid. If assets remain after debts are paid, distribute dividends to the shareholders of the corporation pursuant to the shareholder agreement.

Step 4

File and verify that appropriate forms were filed with the IRS. Check whether Forms 1099-DIV were filed for shareholders receiving distributions over $600. File Form 966 with the IRS to report dissolution of the corporation.

Step 5

File final state and federal tax returns for the corporation and pay outstanding taxes. When filing the returns, check the box indicating that it is the final return for the corporation. Pay sales, excise or any other taxes due to the state on behalf of the corporation.

Step 6

Register for a new employer identification number. Visit the IRS EIN page and click on "Apply for an EIN online." From there, follow the on-screen instruction to set up a new EIN for your sole proprietorship.

Step 7

File for a fictitious business name. If you plan on operating the business under a different name than your own, you will need to register a fictitious business name, or "doing business as" name, with the secretary of state where your company is located.

Step 8

Reapply for licenses and permits. In many states, you are required to acquire new professional licenses if your business changes structure. Check with your local licensing department to clarify if you are required to reapply.

Step 9

Notify business partners about the change to a sole proprietorship. Specifically, you should notify your insurance company and your bank about the change. Additionally, suppliers, customers, employees and other business partners should be informed.

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