How Is a Sole Proprietorship Terminated?

How is a sole proprietorship terminated? The termination occurs immediately when the owner dies.3 min read

How is a sole proprietorship terminated? The termination occurs immediately when the owner dies. This holds true even if another relative, including a spouse, relative, or friend, takes on ownership and keeps the business up and running. In this case, although the business is still active, it is considered a new legal business.

When Else Does a Sole Proprietorship Terminate?

A sole proprietorship also terminates in the following situations:

• The business is sold to another person or persons.
• The owner abandons the business.
• If the owner files for personal bankruptcy.

If the business is terminated, the owner is still responsible for any outstanding debts that occur. If the debt is substantial, bankruptcy may be the only option. In this scenario, the owner may be expected to liquidate the business assets as a way to pay creditors as much of the debt possible.

What Is a Sole Proprietorship?

A sole proprietorship is business is done without a formal creation process and is common with small businesses, self-employed freelancers, consultants, and independent contractors. Other business types that fall in the category of a sole proprietorship include, but are not limited to, the following:

• Food services.
• Agriculture, hunting, and fishing.
• Construction.
• Education services.
• Manufacturing.
• Real Estate.
• Utilities

Sole proprietors can do the following:

• Sell goods and services.
• Have employees.
• Own all assets used in the business.

There are no official rules when forming a sole proprietorship. The only legal requirement is to register a business name that is not in use by another sole proprietorship and obtain a business license if needed. Unlike a professional corporation and other business types, a sole proprietorship is not a separate legal entity from its owner.

Pros and Cons of a Sole Proprietorship

Advantages of a sole proprietorship include the following:

• It's the simplest form of business ownership.
• Provides the ability to avoid self-employment taxes.
• Lets the owner choose to keep any profits the business generates, or if preferred, share the profits with others.
• The owner can make all business-related decisions.
• Neither a board of directors or required meetings with the directors is needed.

Disadvantages of a sole proprietorship include the following:

• The total liability for all business debts or losses incurred by the business.
• Lack of business continuity if the owner dies, retires, or becomes disabled.
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• Funding the business is limited to the funds of the owner, or fund acquired through outside loans.
• If the owner dies, all assets are transferred to the heirs. If they choose, they can sell the assets, or sell the business entirely.
• High-valued employees may refuse to work at a sole proprietorship business of the risk associated with the business terminating if the owner dies or becomes incapable of running the business.

Sole proprietorships are taxed on a personal level. Any profits earned by the business are taxed as personal income. This includes any money used to improve the business. This happens because the business is not set up like a corporation, which allows a separation between the business and owners assets.

Terminating a Sole Proprietorship

Owners of sole proprietorships should plan ahead by taking steps to prepare for their death or withdrawal from the company. Preparations that can be made include the following:

• Having a will or revocable trust written and it should name the beneficiary.
• Creating a buy-sell agreement with relatives, employees, or anyone who can take over the business.

While a formal dissolution process doesn't exist, the government and creditors should be given proper notification. Additional steps include the following:

• Cancel all business licenses and permits.
• Pay employees their last and final paychecks.
• Keep all business records for tax filing purposes.
• Cease the sale of any goods or services sold by the business.

If the business is financially viable, the owner may look into selling the company rather than terminating. To do this, a sales agreement must be prepared between the seller and the buyer. The sales agreement should detail what will be sold to the buyer, including business assets, client lists, intellectual property, and goodwill.

If the business has inventory, like a retail store, the owner may proceed with a liquidation of assets. This allows the owner to sell any assets they don't wish to keep after termination. During a business liquidation, prices fall around 20 percent less than the retail value of the item. Prices can be estimated with the help of qualified appraisers.