Liability After the Selling of a Sole Proprietorship

When you make the decision to sell your small business, you have to find a buyer and negotiate a sales price. The transfer process and any lingering liability you may face after the sale depends upon the legal structure of the business. Sole proprietors remain liable for any business activity that happened while the business operated under the owner's name, and this liability can't be transferred to the buyer.

A sole proprietorship is a business activity that operates as an alternative aspect of an owner's individual identity. The business does not have an independent existence apart from the owner. Instead, all of the assets and liabilities that are generated through the business activity of a sole proprietor are in the owner's name.

Because a sole proprietorship is not independent from its owner, it cannot be sold as a complete business entity. Independent business entities, such as corporations, can be sold in their entirety by transferring all of the entity's ownership instruments, such as 100 percent of a corporation's stock. When 100 percent of the ownership interest in an independent entity is sold to a buyer, that buyer steps into the shoes of the prior ownership, taking on all of the entity's existing assets and liabilities. A buyer can't legally step into the shoes of a sole proprietor and take on all assets and liabilities because the buyer can't assume the proprietor's personal identity.

A sole proprietor can only sell his business by engaging in an asset sale, where the owner chooses which of his personal assets that have been used in the business will be included in the sale to the buyer. Since all of the liabilities involved in the business are in the owner's name, he can't easily transfer any of them to the buyer. For example, if the owner has an outstanding business loan, the loan is in his name. He remains responsible for paying the loan off, even if he sells the assets of the business. All existing extensions of credit that are used to support the sole proprietorship are also in the name of the owner, and he would remain responsible for the accounts despite the sale of assets.

A sole proprietor has unlimited personal liability for the business activity that takes place under his name. Once the proprietor sells the assets of the business to a new owner, he remains responsible for any liability or obligation that is tied to his time running the business. The original proprietor still has to pay off any business debts, even if he has to dip into personal funds. He can also be sued based on business activity that happened while he was in business, up until the point that the statute of limitations for such actions runs out. If the sole proprietor is saddled with business debt even after the asset sale, his only option may be to file personal bankruptcy and request a discharge.