How to Switch an S Corporation to Sole Proprietor

An S Corporation is a legal entity that provides a separation between the obligations of the company and the assets of the owners. Under the legal doctrine of limited liability, the owners of a properly run corporation are not personally liable for the obligations of the business. This encourages entrepreneurship because owners of corporations need not risk being personally wiped out from taking a business risk. However, corporations are more expensive and difficult to maintain than sole proprietorships. If you have little risk of being sued over a business matter, you may wish to convert to a sole proprietorship.

Log on to the website of the office of the secretary of state for the state in which you live.

Look for a section in that web site called "business filings" or "business entities." Click on that link.

Search for forms specific to S Corporations. Look for a form called "Articles of Dissolution."

Complete the Articles of Dissolution form. Depending on your state, there may be a filing fee. You must also pay off all outstanding obligations of the company before filing to dissolve.

File a Form 996 with the Internal Revenue Service. This form officially notifies the IRS that the S Corporation will no longer be doing business. Download Form 966 from the IRS website.

Apply for a business license in your county as a sole proprietor. Your old business license, if it was in the name of your S Corporation, is invalid.

Tips

  • If you continue business after dissolving your corporation, you are automatically a sole proprietor. You do not have to file anything extra, but you do need a business license. You may also need to obtain a new Employer Identification Number from the IRS.

Warnings

  • If you convert from a corporation to a sole proprietor, you lose the benefits of limited liability protection.

References

Resources

About the Author

Jason Van Steenwyk has been writing professionally since 1998. A former staff reporter for "Mutual Funds Magazine," he has been published in "Wealth and Retirement Planner," "Annuity Selling Guide," "Registered Rep." "Bankrate.com" and "Senior Market Advisor." He holds a Bachelor of Arts in humanities from the University of Southern California.