Dissolution of Sole Proprietorship

by Elizabeth Rayne
Sole proprietors face unique challenges when closing a business.

Sole proprietors face unique challenges when closing a business.

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When it comes time to discontinue the operations of a business formed as a sole proprietorship, owners may find obstacles that prevent them from simply walking away from the company. This is due to the fact that, throughout the life of the organization, the assets and liabilities of the business have become intermingled with the assets and liabilities of the individual owner. The result is that complete dissolution of a sole proprietorship may be more of a challenge than with other business entities.

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Dissolution Overview

The word “dissolution” is typically applied to independent business entities, such as corporations. Generally, when these entities dissolve, they must formally notify the state by filing dissolution paperwork with the business registrar. But sole proprietorships are formed as soon as an individual starts doing business and operate under the sole responsibility of the owner. A sole proprietorship is not a separate business entity that needs to be dissolved. Instead, it simply winds up its affairs and ceases doing business.

Debt Management

Because a sole proprietorship is merely the alter ego of the business owner, the business owner is personally responsible for all of the debts and obligations of the business. To close down the business, the owner must create a plan to pay off all business debts, including issuing final paychecks to any employees. Typically, an owner will sell assets that were used for the business to pay off debts. If outstanding debts remain, the owner must repay them from personal funds.

Licenses and Registrations

Since a sole proprietorship typically does not have to register to do business in the state, it will not be necessary to cancel state registration. However, the business may have other licenses, such as occupational or local permits, and properly canceling or surrendering unused permits may protect your professional reputation. If you registered a fictitious business name, or DBA, for your business, contact your local business registrar to find out how to submit notification that you are no longer using the business name. .

Tax Filings

A sole proprietorship must address all tax filings before going out of business. Your business may be responsible for sales, payroll, or other state or federal taxes. Like other debts, the owner is personally responsible for tax debt not paid by the business.

Notifications

In addition to debtors and creditors, a sole proprietorship should notify all customers and vendors that the business is closing. A sole proprietor should close all business bank accounts and credit cards. If your business had an employer identification number, or EIN, with the IRS, you may close your business account by writing to the IRS.