Closing a Sole Proprietorship
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. Every sole proprietorship is different, but examples are useful for conveying the basics.
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
For years, Jane's friend's told her that she should sell her delicious blue cheese salad dressing. After some investigating, she realized that she could market, sell, and distribute her salad dressing over the Internet. She set everything up -- she was required by state law to apply for a Certificate of Trade Name and give notice of her intent to do business as "Salad Goddess." She also obtained a sales tax permit from her state tax authority and had her kitchen licensed. Jane and her husband did all of the work and she reported Salad Goddess profits and losses on her and her husband's jointly filed income tax return.
After five years in business, Jane became tired of always smelling like blue cheese and 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. General disorganization has resulted in Acme's failure to deliver its annual report to the secretary of state. In fact, Acme's management had no idea that they had to file an annual report with 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. Acme immediately hires an attorney and an accountant who pull together the annual reports and send them to the secretary of state. Acme can now continue to do business.
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 over the past year. 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. The water supplier will be paid along with other creditors from the sale of the 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." Once he raises some capital, he is going to open a small cart in a local mall and hire people to execute his designs. In the meanwhile, he and his wife work diligently on scenes from the 1999 Superbowl. In the middle of the frenzy, his older brother, Joe, a wealthy investment banker, visits Dan. Dan has always admired Joe and trusts his judgment. Joe dismisses Dan's business idea as ridiculous. Although Dan is crushed, he knows his brother is right and 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. After being in business for ten years, George became involved in an organization that demanded donation of personal property. George determined that this meant that he had to sell real estate for below market prices to the members in his organization. He eventually was selling real estate to all of the organization members at extremely low prices.
Zeke finally determined that George was going to bankrupt the business, so he 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.
Closing a Sole Proprietorship: Need Legal Counsel?
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 consider calling a business and commercial law attorney if you have additional questions.
See FindLaw's Closing a Business section to learn more.