Going From a Partnership to a Sole Proprietorship

By Maggie Lourdes

A sole proprietorship is a form of business that involves one person. All decisions, operations and management powers rest with a single party. A general partnership involves two or more parties operating as a business. Certain kinds of partnerships, like limited liability partnerships, must formally register in the state where they do business.

A sole proprietorship is a form of business that involves one person. All decisions, operations and management powers rest with a single party. A general partnership involves two or more parties operating as a business. Certain kinds of partnerships, like limited liability partnerships, must formally register in the state where they do business.

Changing Business Forms

Parties who wish to transition from a partnership to a sole proprietorship should reach a clear understanding of how final profits, assets and partnership liabilities will be divided. The parties should negotiate details such as whether the ultimate, sole proprietor may continue to use the partnership's name, customer lists, inventions and trade secrets.

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Written Agreements

All agreements regarding the dissolution of the partnership to allow the survival of a sole proprietor should be put into writing. Every understanding should be included on paper and all involved parties should sign and date it. It is wise to have the agreement witnessed by two disinterested persons and/or notarized.

State Dissolution

If the parties have a limited liability partnership or other partnership formation that requires state registration, then filing the proper paperwork to dissolve the entity with the state is required. This should be done after the parties have a firm understanding in writing regarding the details of the change. The parties may call the state corporations division or visit its official website to obtain proper dissolution forms.

Tax Issues

Special care should be taken to adjust to the differences in federal and state tax filing regulations. For example, sole proprietors do not need to file an IRS 1065 form showing partnership profits. They generally report business income on 1040 Schedule C forms with their individual tax filings. Also, the IRS requires a sole proprietor who is absorbing an existing business to obtain a new employer identification number. Parties should speak to an accountant or tax official to determine if a new EIN is required based on the specific details of their business transformations.

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Dissolving Legal Partnerships

References

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South Carolina LLP Laws

South Carolina law regulates how a Limited Liability Partnership, or LLP, may form, operate, and ultimately dissolve. Unlike limited partnerships or general partnerships where one or more partners are personally liable for the debts of the business, an LLP limits liability for all partners. Each partner may participate in the management of the business, and receive a portion of the profits.

California General Partnership Law

The law defines a general partnership as an association of two or more persons who carry on business with the aim of making profit. The term “persons” generally includes not only individuals, but also other business entities. Most partners sign a formal partnership agreement, setting out their respective rights and obligations; however, this isn't necessary, as a partnership can operate on nothing more than a handshake. Title 2 of the California Corporations Code sets out the law relating to general partnerships in the state.

Documents Required to Dissolve A California Limited Partnership

The legal form of limited partnership offers businesses a blend of limited liability and organizational flexibility. A limited partnership has two categories of partners: general partners run the business and accept personal liability for the debts of the partnership, and limited partners provide capital and do not generally participate in the management of the business. Limited partner liability is limited to the amount of capital a limited partner invests in the business.

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