What Causes the Dissolution of a Sole Proprietorship?
Business Models & Organizational Structure
By Jeffrey Thomas
What Happens to an LLC When a Member Dies?
Limited Partners & Bankruptcy
What Types of Business Organizations Are Owned by the Stockholders?
Can Owners of an LLC Be Liable for Fraudulent Operations of the Company?
Advantages and Disadvantages of Different Business Structures
Three events can cause the dissolution of a sole proprietorship: the owner's decision, death or disability of the owner and bankruptcy -- which may include the owner's assets as well as those of the business. These have differing effects on how the business ceases operation.
The Owner's Decision
A sole proprietor reports to no one but himself. Sole proprietorship gives the owner the right to manage his business as he sees fit. Should he decide to do so, he can close the business or sell it at will. A sole proprietor need not give anyone a reason for his decision, as he has neither partners nor stockholders. Some government licensing agencies, however, may require notification of a business closure.
Death or Disability
The law makes no legal distinction between a sole proprietor and the business he operates. Accordingly, the death of the owner effectively terminates the business. A representative of the owner or his family may wind up the affairs of the business in an orderly fashion.
Unfortunately, incapacitation of the owner -- the inability to conduct business -- may have the same effect as death. If able to do so, the owner should appoint someone to conduct the business until he is able to do so, enabling the business to continue operation.
Bankruptcy may offer a way to dissolve a sole proprietorship and sell off its assets in an orderly manner. Alternatively, creditors may start an involuntary bankruptcy to protect their interests.
Bankruptcy does not distinguish between the personal and business debts of a sole proprietorship. As a result, otherwise purely personal matters, such a divorce or family illness, can trigger the dissolution of a sole proprietorship via bankruptcy. A Chapter 7 bankruptcy liquidates all of the assets of the bankrupt person to pay liabilities. These include the assets of a business owned as a sole proprietorship.
On a Positive Note
One more reason exists for the dissolution of a sole proprietorship. If a business outgrows the advantages of sole proprietorship, the successful owner may want to incorporate in some way. The most common form of small business corporation is a Limited Liability Company (LLC). By incorporating and transferring the assets of his business, the sole proprietor terminates his old business and creates a new business entity.
Preserve Articles: What are the advantages and disadvantages of Sole Proprietor Form of Business?; Chinmoy Kumar
Lawyers: Death and Incapacity and Your Small Business
Wall Street Journal: The Double Whammy of Bankruptcies; Simona Covel, Sept. 28,2009
The New York Times: Advantages and Disadvantages of Sole Proprietorships; June 5, 2007
Lawyers: Business Bankruptcy FAQs
Legal Zoom: Is it time to Convert your Sole Proprietorship to a Corporation or LLC?; Ann MacDonald; December 2007
Real Life Accounting: Liquidating a Small Business; John W. Day; 20085
Internal Revenue Service: Closing a Small Business
Jeffrey Thomas has more than 20 years of experience in accounting and financial management. His background includes property and asset management, investor relations and construction finance. Thomas holds a Bachelor of Arts in English and certification in business management, and owns a consulting business in the Seattle area.
Can a Sole Proprietorship File Chapter 11?
Tax Rules for Sole Proprietorship & Bankruptcy
Canceling an LLC
Examples of Business Exit Strategies
Do Stockholders Have a Say in Business Decisions?
Can You Be Sued by a Partner in a General Partnership if You Don't Agree to Close a Business?
How Does an Incorporation Work on a Bankruptcy?
What Does It Mean to Dissolve a General Partnership?
Bankruptcy Options for a Sole Proprietorship or LLC
1 Can a Sole Proprietorship File Chapter 11?
2 Tax Rules for Sole Proprietorship & Bankruptcy
3 Canceling an LLC
4 Examples of Business Exit Strategies