Closing a sole proprietorship is different -- and typically much easier -- than closing a corporation or partnership. For the most part, sole proprietors do not have to consult with anyone else before deciding to call it quits. However, sole proprietors still have responsibilities and obligations to tend and also may have outstanding loans to pay off.
Below, you'll find a detailed hypothetical about starting and closing a sole proprietorship, followed by examples of closing a corporation or partnership. By comparing and contrasting, you should get a better understanding of how the process works.
Closing a Sole Proprietorship
Jane decides to sell her delicious blue cheese salad dressing. After some investigating, she realizes that she could market, sell, and distribute her salad dressing over the Internet.
After five years in business, Jane decided to close down her business. Because all states have different requirements for closing businesses, Jane checked with the Small Business Administration office in her area to determine whether she needed to notify the secretary of state, local tax authorities, or licensing entities of her decision to close her business. She found out that she is required to send a letter to the secretary of state discontinuing the Salad Goddess trade name. She also had to notify the state tax authority and the licensing entity. That completed, it was time to dismantle her business:
She filled her final orders.
She closed her website in two stages - she initially posted a message about closing her business and no longer taking orders and removed the order-taking pages from the site. She planned a complete shutdown of the site a number of months later, when it seemed that enough customers had seen the message.
She notified her creditors and debtors that she was closing and told them to submit final bills or payments.
She paid all of her outstanding bills.
She made sure that her suppliers knew that she was no longer in business.
She donated the balance of her stock to food shelters.
She sold her equipment.
She put aside an appropriate amount of money for taxes and unknown creditors.
She notified her commercial liability carrier of her closure.
She kept detailed records of each transaction in anticipation of completing her income taxes.
Involuntary Dissolution of a Corporation (Administrative Dissolution)
Acme WonderBroom, Inc. has been in business for two years. During that time it has been wildly successful. Acme fails to deliver its annual report to the secretary of state. Acme receives a notice from the secretary of state that they will be dissolved if they do not file an annual report for the last two years within sixty days.
Involuntary Dissolution of a Corporation (Judicial Dissolution)
Love-at-Sea Cruises, Inc. has been in operation for three years. Due to financial mismanagement, it has failed to pay a number of suppliers over the past year. The fresh water supplier brings an action in court requesting that the court dissolve the corporation so it can be paid for all of the water it has supplied. The court determines that Love-at-Sea should be dissolved. It orders Love-at-Sea to wind-up its corporate affairs and liquidate its assets. The court also appoints a receiver to sell and dispose of the corporate assets.
Dissolving a Corporation Before Business Commences
It has been Dan's lifelong dream to start a company that renders great sports moments in embroidery. He has put together a board of directors and has filed the appropriate forms with the secretary of state. He will call his company "Dan's Sports Embroidery, Inc." In the middle of production, his older brother, Joe, a wealthy investment banker, visits Dan. Joe dismisses Dan's business idea as ridiculous. Dan decides that he will not continue.
In many states, all Dan and his board of directors have to do is file a Notice of Dissolution with the secretary of state.
Dissolving a Partnership
After college, Zeke and George started a real estate business. They decided to make it a partnership since they wanted a business form less formal than a corporation and wanted equal rights in regard to the management of the business. They did not bother to formalize a partnership agreement, but instead verbally agreed that the partnership would continue until one or both of them decided to leave the business. George decided that he had to sell real estate for below market prices to the members in his organization.
Zeke asked George to only sell real estate at a price that allowed them to stay in business. George refused. Zeke hired a lawyer who brought an action in court to compel the dissolution and winding up of the partnership.
Get an Initial Case Assessment
While winding down a sole proprietorship is typically straight-forward, and much easier than shutting down a corporation or partnership, it's still very important to follow the rules and make the process as smooth as possible. All business entities have different needs and different experience levels, so contact a local attorney for a free initial case assessment to learn how they can help you avoid critical missteps.