What Happens to Assets in a Sole Proprietorship if it Changes to a Corporation?

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A sole proprietorship is a simple way of running a business under the name and personal liability of the owner. The assets in the sole proprietorship business are in the name of the individual sole proprietor. If the owner decides to incorporate his business, he can contribute his sole proprietorship's assets to the new corporation in exchange for shares in the company.

Business Structure

A sole proprietor has the option of changing the business's legal structure at any time. The owner can incorporate the business by filing articles of incorporation with the state. Although the business may seem to continue on seamlessly, incorporating actually forms a new legal entity that exists independent of its owners, has perpetual existence and offers limited liability for its shareholders.

Business Assets

All of the business assets of the sole proprietorship are owned by the owner personally. Even if the sole proprietorship elects to use a fictitious or doing-business-as (DBA) name, the assets still legally belong to the owner as an individual. Nonetheless, those same assets can be used to form a corporation, which can hold the property in its own name for business purposes.

Read More: Can Business Assets Be Touched if You File Personal Bankruptcy?

Incorporation Transaction

If the sole proprietor decides to incorporate his business, he can choose to contribute business assets from the sole proprietorship to the new corporation as part of the owner's capital contribution to the company. The owner can also decide to keep all or some of the sole proprietorship assets for other uses, lease the assets to the corporation or sell the assets to the new corporation for cash. Since the assets belong to him personally, he is not required to contribute them to the new corporation at all.

Fair Market Value

For tax and other financial purposes, a fair market value must be established for any assets that are contributed to the corporation in exchange for shares. This will establish a tax basis in the shares to calculate a gain or loss if the shares are ever sold in the future, and will establish a historical price per share if the corporation should ever seek to raise outside capital from investors.

References

About the Author

Jeff Clements has been a certified public accountant and business consultant since 2002. He has also worked in private practice as an attorney. Clements founded a multi-strategy hedge fund and has served as its research director and portfolio manager since its inception. He holds a Juris Doctor, as well as a master's degree in accounting.

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