Can I Reorganize a Corporation Into a Sole Proprietorship?

Q: Can I change my S corporation into a regular sole proprietorship? I own a business, I work from home, so I don’t see any real benefit to being incorporated.

A: How does one move a business from a corporation to a sole proprietorship? Some businesspersons may tire of the ongoing reporting burdens of running a corporation, and may wish to switch to the simpler form of business entity: a sole proprietorship.

To answer the question, we must keep a few concepts separate. First, the corporation is a legal entity–even if you shut down a business or stop operating a business, the corporation still continues in existence unless the owners act to dissolve it. A corporation that is dormant or not operating may still be obligated to file file taxes and annual reports with the state–but that depends on which state. To truly end a corporation’s life, its managers must follow the dissolution procedures in the state of incorporation.

But the question of how to *change* a business from a corporation to a sole proprietorship is a different, but related, question. To reorganize a company from a corporation to a sole proprietorship, one simply has to transfer the assets of the corporation to an individual. Once that is accomplished, the corporation no longer owns the business, the transferee sole proprietor owns the business. And you, the owner, simply goes to work as a sole proprietor. Even better, if the corporation has no assets to transfer, then reorganizing into a sole proprietorship can be accomplished simply by ceasing to work in the name of the corporation, and beginning to work as a sole proprietor.

But back to dissolution. If you cease to work at your corporation, and transfer its assets, you’ll leave the corporation active in the state of incorporation. Dissolution is a fairly complicated and expensive process. And, in order to dissolve your corporation, you’ll need to make sure that you’ve fulfilled all your state tax obligations; you’ll need a “tax clearance certificate” from your state’s tax authorities.

Because dissolution of corporations can be somewhat burdensome, some folks choose just to abandon the corporation and let it die. Abandonment can have consequences though: sometimes the tax authorities can come after the former owners. It’s rare, but it does happen.

Michael Spadaccini

Michael Spadaccini is the author of 8 books on self-help legal matters such as, Ultimate LLC Compliance Guide: Covers All 50 States (Ultimate Series), Ultimate Book of Forming Corps, LLCs, Partnerships & Sole Proprietorships, and Ultimate Guide to Forming an LLC in Any State, Second Edition (Ultimate Series).

You can view his Amazon Author Profile Here.