Going from a Partnership to a Sole Proprietorship

By Jeffry Olson, J.D.

Going from a Partnership to a Sole Proprietorship

By Jeffry Olson, J.D.

A partnership is a business owned and operated by two or more individuals. A sole proprietorship is a business owned and operated by one individual. Sometimes, it becomes necessary for a business originally established as a partnership to become a sole proprietorship.

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A Written Partnership Agreement

When going from a partnership to a sole proprietorship, first determine if a written partnership agreement exists. This is required in some states depending on the nature of the partnership.

If a written partnership agreement exists, review the language of the agreement and determine whether it contemplates dissolution of the partnership. Ideally, it will contemplate dissolution of the partnership while allowing one of the partners to continue the business as a sole proprietorship. In that case, follow the terms of the agreement. Comply with any buyout provision to make the transition to a sole proprietorship much smoother.

No Written Partnership Agreement

When no written partnership agreement exists, the process of going from a partnership to a sole proprietorship can be more complicated. First, when dissolving a partnership, you must divide all assets and liabilities of the partnership. Each party is entitled to his or her equal share of any proceeds and is responsible for any remaining liabilities.

If one party wishes to continue the business using the same name and assets of the partnership, the parties must reach an agreement determining the terms for the dissolution. This agreement should be in writing and signed by all parties. It must include all terms, such as use the name of the former business, assets, and customer lists. A complete written agreement prevents future disputes and possible court action.

The partner seeking to continue the business needs to consider any liabilities the partnership has accrued. This includes not only debts, but ongoing contractual obligations. Take these liabilities into account when calculating the value of the partnership as an ongoing sole proprietorship.

Tax Consequences

Any change in a business brings potential tax consequences. The parties should consult with a knowledgeable tax accountant or attorney. The individual conducting the ongoing business will likely need to obtain a new tax ID number from the IRS. The individual may also need to adjust tax withholding and filing status. These are just a few of the tax related issues they must consider.

When going from a partnership to a sole proprietorship, first review the terms of any written partnership agreement. If it provides terms for this change, follow the process established in the agreement. If no partnership agreement exists, the parties should work out an agreement that allows one of the partners to continue the business as a sole proprietorship. Know that each party is entitled to an equal share of the partnership assets and is equally responsible for all liabilities of the partnership. Such liabilities must be considered, including ongoing contractual obligations. Any agreement should be in writing to avoid future conflict.

Consider the tax consequences of dissolving the partnership and operating the business as a sole proprietorship. Transforming a partnership to a sole proprietorship can present an excellent business opportunity, but all parties must move forward with complete information and transparency.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.