Procedure for Change in the Ownership of a Sole Proprietorship

by Jeff Clements
A sole proprietorship consists of physical and intangible assets.

A sole proprietorship consists of physical and intangible assets.

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A sole proprietorship is owned and operated under the responsibility of a single owner. All of its business assets and obligations are in the name of the owner as an individual. If a sole proprietor wants to sell the business, he must sell its assets because the business itself does not have an independent existence that is separate from the individual owner.

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Separation of Assets

The sole proprietor must determine which specific assets will be sold as part of the business. Due to the relatively informal nature of the business structure, sole proprietors will often have assets that are used for both personal and business purposes. Accordingly, when planning to sell the business, it is important to identify which assets will be sold to the new owner and which will be retained for personal use by the outgoing owner.

Business Valuation

The parties to the transaction must agree on a fair price for the business. This is not an exact science since all businesses and deals have their own unique traits. However, the business valuation is normally based upon factors such as the profitability and cash flow from operations and business's physical and intangible assets, such as brand value and goodwill created by the sole proprietor.

Sales Contract

The final agreed-upon terms of the sale should be reduced to writing. This can help to prevent and resolve any disputes that may arise between the buyer and seller, and support the tax basis the new owner has in the various business assets acquired as part of the buyout transaction. Basis represents the asset's initial value for tax purposes, which is subject to annual deductions for ongoing depreciation. Also, other non-financial matters are important to document, such as the closing date for the purchase transaction and if and to what extent the outgoing owner will assist the new owner facilitate the ownership transition.

Account Closures

A sole proprietorship's vendor and supplier (operating) accounts and bank and credit (financial) accounts are typically in the name of the owner as an individual, not in the name of the business. To transfer full ownership of the business without lingering liabilities, the original owner must close out all accounts for the business that are in his name. Consequently, the new owner must open new accounts for the business in his own name. This includes everything from business licenses, state tax registrations, bank accounts, and accounts with various vendors and suppliers for the business.