Liability After the Selling of a Sole Proprietorship

By Jeff Clements

Business owners often sell a business and expect to be rid of future obligations. However, due to the unique position of the sole proprietor, selling the business might not be the end of the story. There are multiple obligations and liabilities that might exist beyond the date of sale, including financial obligations as well as ongoing employment with the business.

Overview

A sole proprietorship is a simple and common form of small business in which the owner is in business for himself without partners or outside shareholders. Sole proprietorships operate under the authority of the individual business owner, so all assets and liabilities are in the owner's name and he is personally responsible for all of its business matters, such as any products sold to customers and any services rendered to clients.

Sale of Assets

The sale of a sole proprietorship does not involve the sale of a separate business entity such as a corporation. A sole proprietorship can sell only its assets; the sole proprietor cannot sell the business as a whole, with all of its assets and liabilities under the umbrella of the business, because everything is in his name and, as a sole proprietor, he and the business are considered one and the same. Furthermore, although the trade name, inventory and equipment may be passed on to a new owner, the previous owner may still be liable for certain obligations.

Ready to start your LLC? Start an LLC Online Now

Existing Liabilities

The business liabilities that are in the owner's name cannot be transferred to another person without the creditor's consent. Hence, a sole proprietor may sell the business - through the sale of its assets - but still remain liable for any debts the business incurred while he operated it. These can include any unassumed debt, current lawsuits and open trade accounts or leases that have not been transferred to the new owner.

Future Liabilities

Additionally, the original owner will be personally responsible for any future liability that stems from business activity during the time he was operating the sole proprietorship. Even though the business has been sold, he can be sued by unhappy customers or others for various reasons until the statute of limitation expires on their claims. Also, new owners often want help in making the transition to new ownership; as a condition of many acquisition agreements, new owners will hire the previous sole proprietor to stay on for a period of time as a manager or consultant.

Ready to start your LLC? Start an LLC Online Now
How to Sell a Sole Proprietorship
 

References

Related articles

Can an Owner of an LLC Be Sued Personally?

When starting a business, a major concern is what the owners’ personal liability will be. Owners are concerned that if their business makes a mistake, not only could they lose their investment, but they could lose their home and other personal assets. Some business organizations, such as sole proprietorships, offer no liability protection; if the business lacks the funds to settle a debt, the owner must make up the difference. Generally a limited liability company (LLC) is different; the owner is not personally liable for the business’ obligations and therefore cannot be sued for the business’ actions. However, there are some situations where the owner of an LLC can be sued personally for the LLC’s actions.

How to Buy an LLC

The business world is full of opinions about the question of whether it is better to buy the individual membership interests in an LLC as opposed to forming a new LLC and purchasing the assets of the existing one. Your decision to use one or the other method is a personal choice that may depend on your individual goals or the goals of your business and what you are trying to accomplish with it.

Is It Difficult to Discontinue a Sole Proprietorship?

Since many owners choose to structure their business as a sole proprietorship due to its ease in startup, it might seem obvious that closing down the business is equally simple. However, because company assets as well as debts are tied to the owner, matters can get complicated as all obligations and taxes must be taken care of before the company can be officially dissolved. Other, less difficult tasks can include the surrendering of industry and local licenses and the cancellation of Doing Business As names and Employer Identification Numbers.

LLCs, Corporations, Patents, Attorney Help

Related articles

Procedure for Change in the Ownership of a Sole Proprietorship

A sole proprietorship is owned and operated under the responsibility of a single owner. All of its business assets and ...

Are All Trademark Names Legally Protected?

All trademark names generally qualify for trademark protection. Basic trademark protections automatically apply to a ...

How to Transfer Ownership After a Limited Liability Company's Termination

Under most state laws, an LLC will have a winding-up period after dissolution or termination during which it will be ...

Can a Startup LLC Assume Sole Propiertor Debts & Assets?

A sole proprietor who wants to transfer assets and debts to a newly-formed limited liability company, or LLC, can ...

Browse by category
Ready to Begin? GET STARTED