A sole proprietorship is an extension of the person that owns the business. This means the proprietor is liable for all debts, and he pays taxes on the income. The sole proprietorship, as a whole business, cannot be transferred. However, assets used to operate the business, from the machines used to make the products to the customer lists used for marketing, can be transferred to another sole proprietorship.
Review the sole proprietorship’s balance sheet. A balance sheet is a summary of the business’s assets and liabilities. Use this document to determine which assets you want to transfer, which assets you want to keep and how much you will need to pay to settle the business’s outstanding financial obligations.
Read More: How to Transfer Ownership of a Sole Proprietorship
Negotiate with the sole proprietor who will receive the assets upon transfer. There are two considerations you need to discuss. First, address which assets and rights the acquiring sole proprietor wants. Second, establish how the acquiring sole proprietor will compensate you. Compensation options range from an immediate lump sum to a series of payments over time.
Establish the current market value of the assets you are going to sell. For tangible assets, such as machinery or office furniture, you can determine their value based on what comparable assets are selling for in the market. For intangible assets, such as customer lists, and real estate you may need to obtain a third party appraiser.
Contact your business’s suppliers, creditors, landlords and other parties with whom the business has contracts. Since the sole proprietorship is an extension of you, you cannot transfer your obligations and contracts to the acquiring party; you must settle them personally. That could be what makes your sole proprietorship valuable - the relationships you have with your suppliers and your business location. When possible, try to negotiate so the acquirer of the sole proprietorship assumes the responsibility for any outstanding contracts and loans. If the other party refuses to let you transfer the obligation, settle the outstanding liability.
Draft a sales contract. The contract should identify you as the seller and acquiring party as the buyer. The assets being exchanged and amount of money to be received should also be included. If you will be receiving payments over time, the contract should specify when and what interest rate you will be charged.
Transfer the assets. For most assets, physical transfer should be sufficient. Check with the business registrar of your state for transfer rules specific to where the business is located. For real estate, you will generally need to execute a deed identifying the acquirer as the new owner. Record this deed in the recorder’s office of the county where the property is located.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.