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.

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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.

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.