Finance And Insurance

How to Dissolve a Sole Proprietorship



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Sole proprietorships may end due to sale of the business, illness of the owner, under-capitalization, lack of profitability or transformation into a different type of corporation such as a partnership, limited liability corporation or S-corporation. Whatever the reason for ending the sole proprietorship, a few measures should be taken to smoothly and hopefully profitably end the business operation.

Financial, legal and ethical dissolution of a sole-proprietorship:

To end a sole proprietorship and sleep well knowing all the t's have been crossed and i's dotted, it can be advisable to take proper steps rather than haphazardly ending the operation and dealing with financial, client, tax, employee and legal issues as they come up. In other words, a systematically dissolved proprietorship can help make possible an orderly closure to business operations.

To dissolve a sole proprietorship with the above considerations in mind involves thorough correspondence/communication with clients, employees and vendors, settling of outstanding invoices and debts, selling of the business if at all possible and maintaining financial records until the last transaction or expense is settled and the final tax filing is completed. These actions are further illustrated below.

Steps to dissolution of a sole-proprietorship:

1. Inform clients: Sending out letters to former and existing clients letting them know the proprietorship will no longer be in business will give them a way to know and prepare for future service needs.

2. Sell the client list or the business: Assuming there are no privacy agreements between the proprietor and the clients, client information can be sold to other business owners upon ending the proprietorship. This gives former clients a potential new service and the proprietor an additional source of revenue for his or her proprietorship efforts in addition to possible clientele to another business.

3. Settle debts and update accounting records: To avoid complication later on and to be prepared when tax time rolls around, it is a good idea to all records including accounting statements, purchase and sale records, accounts receivable and payable, expenses etc. Additionally, settling all debts as soon as possible and documenting all actions taken in the dissolution of the proprietorship provides an alibi and/or legal recourse should potential legal problems arise at a later date.

4. Cease operations: To ensure a clean end to the business informing and documenting cessation of business and service from creditors, service providers and suppliers provides further documentation of dissolution and lets vendors associated with the proprietorship know their services are no longer required.

Tax forms:

Sole proprietors may already be familiar with the tax forms needed during tax filing season, however in the case of those business owners who aren't familiar with the form or those businesses that end operations before the end of one year tax reporting is still required despite ending of business. These documents can be found through the Internal Revenue Service in the United States.

• Form 1040 Schedule C
• W-2's
• Form 940 (FUTA) Employee Unemployment Insurance Tax paid out
• Form 4797 (If the business is being sold)
• Form 8829 (In home office deductions form)

The above forms are only a few of the typical documents required pertaining to the sole proprietorship and do not include personal tax filing forms such as the 1040, Schedule A and Form 1099. To fully understand which tax forms and reporting requirements are needed for a proprietorship researching the tax code, contacting the IRS or a tax accountant or service provider may be helpful and/or necessary.

Dissolving a sole proprietorship should not be too complicated if the sole proprietor knows what he or she is doing and takes the right measures in a coherent and orderly fashion. Doing so can assist the proprietor responsibly cease operations with the knowledge proper closure has been obtained with tax authorities, former clients and vendors, employees and the law. This article has provided a guideline a sole proprietor may use as a source of information when ending his or her business but does not replace any legal, or tax counsel that may be necessary in the dissolution process.

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