How to Transfer Ownership of a Sole Proprietorship

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A sole proprietorship is the alter-ego of its owner. Business assets and liabilities of a sole proprietorship are personally owned by the sole proprietor, not by a separate business entity. The sole proprietor can transfer her business by selling its tangible and intangible assets; thereby, transferring the responsibility of running the business to a new owner.

Separation of Assets

A sole proprietor owns all of her business assets as personal property. The sole proprietor can transfer the business by selling those business assets, but the buyer will need to know what he is buying. Since sole proprietors may use items like a computer, car or desk for both personal and business use, the assets being transferred should be clearly designated in an asset purchase agreement. Keeping a separate bank account and ledgers for business transactions helps make it easier to determine the cash assets of the business as well as which items of property were purchased with business funds.

Business Valuation

Establishing a value or sales price of a sole proprietorship is tricky because the business is intertwined with the know-how of its proprietor and may involve significant intangible assets like skilled labor and goodwill. The buyer and seller may agree to set a price for the business based on the replacement costs of tangible assets, based on a cash-flow or revenue analysis or a combination of both techniques. The sole proprietor can also hire an appraiser to establish the business's value.

Written Agreement

A written sales agreement may be used to specify what will be part of the sale and how business obligations in the name of the original owner will be handled. The agreement should include both tangible and intangible assets, such as customer lists and goodwill, and an agreement not to compete with the operations of the new sole proprietorship. Debts and obligations should either be included in the written agreement or paid off in full before the transfer.

Closing The Sale

The transfer of a sole proprietorship is completed by closing the sale. Both the seller and buyer should sign the agreement and exchange the purchase price for keys, titles and other business assets. Titled assets, like real estate or vehicles, should be re-titled to the new owner. Tax identification numbers and business licenses are generally not transferable, so the sole proprietor should discontinue their use in connection with the sole proprietorship being sold and notify licensing or regulatory agencies of such, if required. In the sales agreement, the seller may wish to instruct the new business owner to apply for the necessary licenses in his own name.

Read More: What if You Don't Sell the Assets in Closing a Sole Proprietorship?