How to Terminate a Sole Proprietorship Business

By Christine Funk, J.D.

How to Terminate a Sole Proprietorship Business

By Christine Funk, J.D.

If you are the owner of a sole proprietorship and wish to terminate the business, there are several steps you can take to accomplish this. In some cases, you can simply do nothing.

Woman working at laptop at desk

Understanding Sole Proprietorships

Sole proprietorships are not legally separate from the owner of the business. As the owner of a sole proprietorship, you account for both income and losses on your individual tax return. Consequently, if you simply decide to cease doing business, the sole proprietorship comes to an end.

Ending a Sole Proprietorship by Doing Nothing

Imagine you own a photography business as a sole proprietor. Imagine, further, you have no clients currently on the books. If you wish to simply stop offering photography services, you can simply stop doing so. Next year, report any income and losses on your taxes and move on.

Terminating a Sole Proprietorship

If ending your sole proprietorship by doing nothing does not fit your business's situation, you can take some or all of the following steps to end your business.

1. Reduce or eliminate inventory.

If your sole proprietorship includes not only a photography business but also a shop with specialty cameras, rare lenses, picture frames, matting paper, and greeting cards, you may want to take steps to reduce or eliminate your inventory. This is not required, of course, if you'd like to keep all the equipment. However, you may wish to host a "going out of business" sale prior to closing your doors. Keep track of your profits and losses for tax purposes.

2. Complete services or offer referrals.

If your business is a service business and you have appointments on the books, common courtesy calls for either remaining available for these services or, in the alternative, providing a referral to another professional. While you may not intend to continue in the business, it is a good idea to provide quality service until the end. This helps maintain goodwill and preserve your reputation in the community.

3. Cancel memberships.

If you are a member of the Better Business Bureau or the Chamber of Commerce, you may wish to cancel your memberships. This is not a legal requirement for terminating the business. However, it does provide notice to the business community of your intention to terminate the business. It may also be a useful record.

4. Cancel your license.

Some businesses require maintaining a professional license. If, for example, you run a daycare out of your home, you may have a daycare license. If you are certain you will no longer be providing such a service, it is a good idea to cancel the license. This helps avoid fees as well as confusion. However, if you are considering keeping your options open, understand that some professions allow you to maintain a license on "nonactive status." Take some time to consider whether this option is a good idea for you.

At the end of the day, there is not a single step that is required to end a sole proprietorship. Instead, ending such a business is primarily a matter of tying up loose ends like closing your business bank account or abandoning your trade name. Make sure to maintain documentation of the steps you take. The Internal Revenue Service may audit you in the future.

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.