Can Someone Take Over a Sole Proprietor Business When the Owner Dies?

Small-business owners should put a plan in place to dispose of the interest of any owner who dies or becomes incapacitated, particularly if the owner wants his ownership interest to remain in his family or to pass to a particular person. The way a person takes over for an owner who has died depends on the way the business is structured. Transfer of ownership of a sole proprietorship can be tricky because the business does not have an independent existence.

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When a sole proprietor dies, all of his assets and liabilities become part of his estate, including the assets and liabilities generated from the business activity. Through a will, the owner’s wishes can be carried out and title to his personal assets that he used in the business can be transferred to the person who will be taking over.

A sole proprietorship is a business activity operated by a single owner who is personally responsible for all obligations that arise from the activity. The business is not an independent legal entity that exists separate from its owner, like a corporation or limited liability company. The business is merely an alter ego of the owner. All business revenue is the owner's personal income, and all assets and liabilities are in the name of the owner.

When a sole proprietor dies, the business no longer exists, leaving a a collection of business assets and liabilities that are in the owner’s name. Unlike a corporation where a new owner can step into the shoes of an old owner by purchasing his shares of stock, there is no way for a person to step in to the shoes of a sole proprietor because the business is part of the proprietor’s identity.

For example, the owner may have been in the process of financing a delivery truck. Upon his death, there remains a truck that is titled, registered and insured in the owner’s name and an outstanding vehicle loan, also in the owner’s name, that must be paid off. An heir or executor will have to address this, as there is no business entity that is responsible for the truck.

When a sole proprietor dies, all of his assets and liabilities become part of his estate, including the assets and liabilities generated from the business activity. Through a will, the owner can leave assets to a particular individual that allow him to continue operating the business. After the bills are paid, the owner’s wishes can be carried out and title to his personal assets that he used in the business can be transferred to the person who will be taking over.

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Some lawyers and financial professionals have expertise in business continuity plans. When planning your estate, ask if your lawyer or financial planner can offer guidance in ensuring that your business continues to operate.

Although you may have the assets of a deceased sole proprietor that allow you to continue the business, your business is actually a new enterprise. As the new owner, you must operate the business under your name and personal responsibility, if you want to continue operating as a sole proprietorship. You must change the name of record on any licenses or registrations, assume legal responsibility for any contracts that were in the prior owner’s name and report business income and expenses under your Social Security number on your personal income tax return.