When Can a Sole Proprietorship Legally Be Dissolved?

When can a sole proprietorship legally be dissolved? This is an essential question as the legal status of a sole proprietorship business can be vague.3 min read

When can a sole proprietorship legally be dissolved? This is an essential question for entrepreneurs as the legal status of a sole proprietorship business can be vague.

Dissolution Overview

Typically, dissolution usually applies to businesses such as corporations which are an independent entity under law. When faced with dissolution, such entities file a formal application to dissolve the business with the business registrar of their home state. However, a sole proprietorship lacks the legal status of an independent entity and requires no formal application for dissolution. All the business owner needs to do to dissolve the entity is cease his or her business operations.

Causes of Sole Proprietorship Dissolution

Several factors may necessitate the dissolution of a sole proprietorship including:

• The owner's decision: Since a sole proprietor is responsible for making all decisions concerning the business, he or she may decide to wind up or sell the business at any point.
• Death or Disability: The death or disability of a sole proprietor may lead to business closure. However, the owner's family or representative can help coordinate the termination of the business' operations.
• Bankruptcy: A sole proprietor may dissolve the business due to bankruptcy issues. Creditors may also initiate bankruptcy proceedings when their interests are threatened. The personal and business liabilities of a sole proprietor are treated the same way during bankruptcy. Thus, personal issues like illness or divorce can make a sole proprietor bankrupt and dissolve the business. If a person files for Chapter 7 bankruptcy, their assets, including the business assets of a sole proprietorship, will be sold to settle debts.
• Incorporation: A sole proprietorship may also be dissolved when the owner feels the business is large enough for incorporation.

How to Dissolve a Sole Proprietorship

The dissolution of a sole proprietorship involves the following steps:

• The first step is to inform clients you are winding up the business. Most states allow a sole proprietor to close shop without any formalities. However, it's important to dissolve in an orderly manner. Send letters to your customers explaining the reason for the closure and thank them for their loyalty.
• Notify creditors you are dissolving the business and request for a final bill to enable you to settle all outstanding obligations.