Going From a Partnership to a Sole Proprietorship

By Maggie Lourdes

A sole proprietorship is a form of business that involves one person. All decisions, operations and management powers rest with a single party. A general partnership involves two or more parties operating as a business. Certain kinds of partnerships, like limited liability partnerships, must formally register in the state where they do business.

Changing Business Forms

Parties who wish to transition from a partnership to a sole proprietorship should reach a clear understanding of how final profits, assets and partnership liabilities will be divided. The parties should negotiate details such as whether the ultimate, sole proprietor may continue to use the partnership's name, customer lists, inventions and trade secrets.

Written Agreements

All agreements regarding the dissolution of the partnership to allow the survival of a sole proprietor should be put into writing. Every understanding should be included on paper and all involved parties should sign and date it. It is wise to have the agreement witnessed by two disinterested persons and/or notarized.

Ready to start your LLC? Start an LLC Online Now

State Dissolution

If the parties have a limited liability partnership or other partnership formation that requires state registration, then filing the proper paperwork to dissolve the entity with the state is required. This should be done after the parties have a firm understanding in writing regarding the details of the change. The parties may call the state corporations division or visit its official website to obtain proper dissolution forms.

Tax Issues

Special care should be taken to adjust to the differences in federal and state tax filing regulations. For example, sole proprietors do not need to file an IRS 1065 form showing partnership profits. They generally report business income on 1040 Schedule C forms with their individual tax filings. Also, the IRS requires a sole proprietor who is absorbing an existing business to obtain a new employer identification number. Parties should speak to an accountant or tax official to determine if a new EIN is required based on the specific details of their business transformations.

Ready to start your LLC? Start an LLC Online Now
How to Cancel an Incorporation

References

Related articles

Difference Between Partnership & Sole Proprietorship

The decision regarding how to structure a new business is one of the first and most important decisions a new business owner must make. Whether to share the risks and rewards of business ownership with other people as partners or maintain complete control over the business as a sole proprietor is a choice that will directly affect the management of the business and how it pays taxes.

Partnership Profit-Sharing Agreements

When two or more people decide to start a business for a profit, the resulting agreement is called a partnership, governed by state law as well as individual contracts. Following the creation of the business, the execution of a profit-sharing agreement is an important step in properly allocating profits and losses between partners and determining individual tax liabilities. If prepared properly, this written document will represent the true intentions of the partners. It does not necessarily need to be based on ownership percentages.

Difference Between Joint Venture & Multi Member LLC

Individuals and companies often cooperate in various ways to pursue different types of business opportunities. Some opportunities call for an ongoing relationship between the partners, as in the case of creating a business such as an LLC. Other opportunities are more temporary, such as a specific one-time project, and call for creating a joint venture.

LLCs, Corporations, Patents, Attorney Help

Related articles

Steps for Dissolving a Partnership in South Carolina

Knowing the process for ending a general partnership can help partners effectively wrap up business affairs when it ...

General Partnership Laws & Regulations

A partnership is a form of business entity owned by more than one partner. The key consideration is that the business ...

Canceling a Partnership Agreement

You may end a partnership agreement for any reason including disagreements among the partners, or the need for a ...

How to Dissolve a Limited Partnership in New York State

A limited partnership must have at least one limited partner and one general partner. Limited partners do not usually ...

Browse by category
Ready to Begin? GET STARTED