Liability After the Selling of a Sole Proprietorship

by Jeff Clements
Even after selling their business, sole proprietors can be named in litigation and may be liable for debts.

Even after selling their business, sole proprietors can be named in litigation and may be liable for debts.

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Business owners often sell a business and expect to be rid of future obligations. However, due to the unique position of the sole proprietor, selling the business might not be the end of the story. There are multiple obligations and liabilities that might exist beyond the date of sale, including financial obligations as well as ongoing employment with the business.

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Overview

A sole proprietorship is a simple and common form of small business in which the owner is in business for himself without partners or outside shareholders. Sole proprietorships operate under the authority of the individual business owner, so all assets and liabilities are in the owner's name and he is personally responsible for all of its business matters, such as any products sold to customers and any services rendered to clients.

Sale of Assets

The sale of a sole proprietorship does not involve the sale of a separate business entity such as a corporation. A sole proprietorship can sell only its assets; the sole proprietor cannot sell the business as a whole, with all of its assets and liabilities under the umbrella of the business, because everything is in his name and, as a sole proprietor, he and the business are considered one and the same. Furthermore, although the trade name, inventory and equipment may be passed on to a new owner, the previous owner may still be liable for certain obligations.

Existing Liabilities

The business liabilities that are in the owner's name cannot be transferred to another person without the creditor's consent. Hence, a sole proprietor may sell the business - through the sale of its assets - but still remain liable for any debts the business incurred while he operated it. These can include any unassumed debt, current lawsuits and open trade accounts or leases that have not been transferred to the new owner.

Future Liabilities

Additionally, the original owner will be personally responsible for any future liability that stems from business activity during the time he was operating the sole proprietorship. Even though the business has been sold, he can be sued by unhappy customers or others for various reasons until the statute of limitation expires on their claims. Also, new owners often want help in making the transition to new ownership; as a condition of many acquisition agreements, new owners will hire the previous sole proprietor to stay on for a period of time as a manager or consultant.