Dissolution of Sole Proprietorship

By Elizabeth Rayne

When it comes time to discontinue the operations of a business formed as a sole proprietorship, owners may find obstacles that prevent them from simply walking away from the company. This is due to the fact that, throughout the life of the organization, the assets and liabilities of the business have become intermingled with the assets and liabilities of the individual owner. The result is that complete dissolution of a sole proprietorship may be more of a challenge than with other business entities.

Dissolution Overview

The word “dissolution” is typically applied to independent business entities, such as corporations. Generally, when these entities dissolve, they must formally notify the state by filing dissolution paperwork with the business registrar. But sole proprietorships are formed as soon as an individual starts doing business and operate under the sole responsibility of the owner. A sole proprietorship is not a separate business entity that needs to be dissolved. Instead, it simply winds up its affairs and ceases doing business.

Debt Management

Because a sole proprietorship is merely the alter ego of the business owner, the business owner is personally responsible for all of the debts and obligations of the business. To close down the business, the owner must create a plan to pay off all business debts, including issuing final paychecks to any employees. Typically, an owner will sell assets that were used for the business to pay off debts. If outstanding debts remain, the owner must repay them from personal funds.

Ready to start your LLC? Start an LLC Online Now

Licenses and Registrations

Since a sole proprietorship typically does not have to register to do business in the state, it will not be necessary to cancel state registration. However, the business may have other licenses, such as occupational or local permits, and properly canceling or surrendering unused permits may protect your professional reputation. If you registered a fictitious business name, or DBA, for your business, contact your local business registrar to find out how to submit notification that you are no longer using the business name. .

Tax Filings

A sole proprietorship must address all tax filings before going out of business. Your business may be responsible for sales, payroll, or other state or federal taxes. Like other debts, the owner is personally responsible for tax debt not paid by the business.


In addition to debtors and creditors, a sole proprietorship should notify all customers and vendors that the business is closing. A sole proprietor should close all business bank accounts and credit cards. If your business had an employer identification number, or EIN, with the IRS, you may close your business account by writing to the IRS.

Ready to start your LLC? Start an LLC Online Now
Is It Difficult to Discontinue a Sole Proprietorship?


Related articles

What Happens to Your EIN When Dissolving a Corporation?

When you formed your corporation, you applied for an Employer Identification Number (EIN) from the Internal Revenue Service. This number uniquely identifies your business, and it is used on federal tax filings and all other correspondence with the IRS. State government agencies also typically require the use of the EIN on tax filings and correspondence. If you are thinking about winding down the business of your corporation, you might wonder what will happen to your EIN and whether it terminates when your business is dissolved.

Canceling an LLC

A limited liability company, an independent business entity formed under state law, comes into existence when a business files articles of organization with the state. The owners, or members, of an LLC are not personally liable for the business's debts. After making the difficult decision to close your LLC, you should dissolve the corporation in accordance with state law to start your next business venture unencumbered.

What Do You Need to Register a Business Name?

For many customers, your business name is the first point of reference they have with regard to your company. Leave a good impression, and you could be well on your way to making a lifelong customer. Give a bad impression, and that person might never give your business a chance. How you register the name of your business depends on the type of name you're registering.

LLCs, Corporations, Patents, Attorney Help

Related articles

Cancelling a DBA

A "doing business as" name, also known as a trade name and a fictitious business name, is the name under which a ...

Difference in Business License & Registering a Business

Starting a business can be complicated. In addition to hiring employees, finding a location and establishing clientele, ...

Dissolving a Sole Proprietor Type of Business in North Carolina

North Carolina does not require sole proprietorships to register or to obtain a statewide business license. Instead, a ...

Maryland's LLC Dissolution Law

By properly dissolving your limited liability company, you can ensure that creditors and state agencies are notified ...

Browse by category
Ready to Begin? GET STARTED