How to Dissolve a Corporation & Go Back to Sole Proprietorship
Some small-business owners think big and set up shop as a corporation, only to find out later that using such a complex business structure is an unnecessary headache. Fortunately, you can change your business structure at any time. Changing from a corporation to a sole proprietorship requires you to close down the corporation and start a new business as a proprietor.
File articles of dissolution with the state agency that accepted your articles of incorporation. In most states, the secretary of state’s office manages corporate filings.
Notify creditors that you are closing down the corporation. Ask them to send you a final bill and set a deadline for receipt. Make them aware that you will be staying in business as a sole proprietor. If you want to maintain the relationship, make arrangements to open new accounts in your own name.
Pay off all business creditors. Set aside enough money to pay any unknown creditors that might make a claim on the corporation.
Publish notice of the dissolution in a local newspaper, if required by state law. Many states require publication so unknown creditors have a chance to make a claim on the company’s assets. Some states also require the corporation to file proof of publication with the secretary of state.
Satisfy all tax obligations. If you have employees, pay final state and federal withholding taxes. If you owe state sales tax, remit final payment to the state tax authority, and close the corporation’s tax account. Prepare the corporation’s final federal and state income tax returns. Make sure to mark the “final return” box on each return.
Distribute any assets that remain after paying creditors to yourself as the sole shareholder of the corporation. You can use these assets to continue your business as a sole proprietorship. The Internal Revenue Service will treat this distribution as a taxable transfer. You may need to consult an accountant to correctly account for the tax consequences.
Verify that you are operating in a state that does not require sole proprietors to obtain a state business license to operate. Only a handful of states, including Nevada, have this requirement. Check with the business division of the secretary of state’s office or local small business development center for an answer.
Obtain any specialty registrations, professional or trade licenses, or permits that are necessary for the type of business in your name. For example, if you want to run the sole proprietorship under the same name as the corporation instead of under your own legal name, you must register a fictitious business name, also known as a “doing business as,” or DBA, with the proper state or local agency. Likewise, local permits, such as a health permit, must be acquired under your own name as a proprietor.
These instructions assume that if you are switching your corporation to a sole proprietorship, you are the sole shareholder of the corporation. A corporation with multiple shareholders would have to obtain majority consent of the shareholders to dissolve, and any remaining assets after paying creditors would be distributed in proportion to each shareholder's ownership interest.