How to Change from a Corporation to a Sole Proprietorship

By Tom Speranza, J.D.

How to Change from a Corporation to a Sole Proprietorship

By Tom Speranza, J.D.

If you've organized your business as a corporation, there may be circumstances when it makes sense to convert the business to a sole proprietorship. A sole proprietorship is when there is one person running a business and no distinction about the owner and business entity. Perhaps your business no longer has other owners or investors, or maybe the business once had employees but now just uses independent contractors. You may just want to simplify your tax filings and avoid the paperwork and expenses required to maintain a corporation.

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Changing from a Corporation to a Sole Proprietorship

Although each state has slightly different dissolution procedures, the steps for changing a corporation into a sole proprietorship are mostly the same.

1. Authorize a dissolution.

Most states require a vote of the board of directors and shareholders to authorize a dissolution. If you're converting your corporation to a sole proprietorship, you are probably the sole director and sole shareholder, so a simple director and shareholder resolution signed by you in both capacities suffices as the required official written consent.

The resolution should authorize and approve:

  • A dissolution of the corporation and the filing of any required documents with the state
  • A liquidation of the corporation transferring all of the corporation's assets and liabilities to you

2. File dissolution documents.

After obtaining written consent, you dissolve the corporation by filing articles of dissolution, sometimes called a certificate of dissolution, with the Secretary of State or equivalent office in your corporation's formation state. If you are unsure about anything when filing dissolution documents, it may be helpful to contact an attorney to assist you.

If your corporation qualified to do business or registered in other states, it must also terminate its legal existence in those states. After filing for dissolution in the corporation's formation state, you must file articles of withdrawal, sometimes called a certificate of withdrawal, in each other state where the corporation is qualified to do business. Filing for dissolution and withdrawal usually requires a filing fee.

3. Pay and establish reserves for financial obligations.

Your corporation's formation state and the other states where it is registered do not consider your LLC completely dissolved or withdrawn until it settles all outstanding tax obligations for sales tax, franchise tax, income tax, and any state-mandated employee payroll deductions. Pay these and any federal taxes to finalize the dissolution.

State law also requires a dissolving corporation to set aside funds to pay any future corporate liabilities that are known to exist, such as a pending lawsuit or an obligation to contribute to an employee retirement plan. If the exact amount of the potential liability is uncertain, the reserved funds should represent your good faith estimate of the future payment obligations.

4. Transfer corporate assets and liabilities to yourself.

Your corporation is the legal owner of your business assets. This includes land, buildings, equipment, inventory, supplies, trademarks, customer contracts, cash-on-hand, and accounts receivable. It is also the legal owner of your business liabilities, including real estate leases, vendor contracts, software licenses, bank and credit card debt, and taxes. Since the sole proprietorship will be owned by you directly, everything owned in the corporation's name must be transferred to you as part of the company's liquidation.

This sounds simple, but the details are often complicated. For example, any real estate owned by the corporation can only be transferred to you in a formal closing that involves the filing of a deed, a refinance or payoff of the mortgage, and buying a title insurance policy. Any bank loan or contract that the corporation signed cannot be assigned to you without the bank's or the other contract party's consent. Oftentimes in business, changing needs and trends make scaling back a wise option. Converting a corporation to a sole proprietorship can be a complicated process.

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.