What Happens to a Sole Proprietorship When the Owner Dies?

A sole proprietorship is the simplest form of business structure and is most often chosen by entrepreneurs when starting a small business. The sole proprietor is the business's only owner and is personally liable for any debts owned by the business. When forming a sole proprietorship, it is important for the owner to understand what will become of the business upon her death.

Unlike a corporation, there is no separation of ownership with a sole proprietorship. The owner and the business are considered the same legal entity, and the owner reports all business profits and losses on her personal income tax return. When the owner dies, in essence, the business dies with her. The executor or administrator of the business owner's estate manages the business's assets in the same manner as personal assets.

When the sole proprietor's executor takes control of the estate, he will liquidate any remaining business assets such as a building or equipment to pay off any remaining debts of the business. Any remaining assets will be distributed according to the owner's wishes as indicated in her will. If the owner did not have a will, the assets will be distributed to the heirs in accordance with the intestacy laws of the owner's state. It is possible that estate expenses could significantly reduce the value of any distribution.

If the sole proprietor wishes to see her business survive beyond her death, one option is to sell the business while she is still alive. Sale proceeds can be used for purposes such as funding a retirement. The business can be sold to a long-time employee who has expressed an interest in running the business, or to another family member who may already be involved in the business's daily operation. Another option is to set up a partnership arrangement where the ownership interest of one partner passes to the other owner upon a partner's death.

The estate could also choose to sell the business to another family member during settlement. The family member could elect to carry on the business under his own name. If he has no interest in continuing the business, he could elect to sell it to a new owner or simply close its doors and liquidate any remaining assets. He could also keep the business and hire someone to operate it for him or take on a partner.