Sole Proprietorship Termination and Liability

Termination of a Sole Proprietorship

  • A sole proprietorship is terminated through:

  • Express act of the principal (the owner).

  • Operation of law (e.g., death of the proprietor, personal bankruptcy).

  • Asset Sale: The sole proprietor can sell business assets, but ownership cannot be transferred to heirs by gift or through an estate.

Case Study: Biller v. Snug Harbor Jazz Bistro, LLC

  • Background:

    • Proprietor: Brumat, owner of Snug Harbor, a restaurant and music club.

    • Location: Frenchmen Street, New Orleans.

    • Event: Brumat died in July 2007.

  • Will:

    • All property, except for a piano, was left to niece Luana Brumat.

  • Formation of LLC:

    • In September 2007, Luana and Brumat's former bookkeeper formed Snug Harbor, LLC, registering as its officers.

  • Legal Action by Biller:

    • In 2009, Biller obtained an $80,000 judgment against Snug Harbor regarding an accident from April 2007.

    • Biller argued that Snug Harbor, LLC was a successor to the original sole proprietorship and thus liable for the debts.

  • Arguments by Snug Harbor, LLC:

    • LLC denied liability, claiming it was a new entity formed after Brumat’s death and the original sole proprietorship ceased to exist upon Brumat's demise.

  • Court's Ruling:

    • The trial court decided in favor of Snug Harbor, LLC, affirming that it was not a successor in interest.

    • The court highlighted that:

      • The original business terminated with Brumat's death.

      • New leases and contracts signified the formation of a separate entity.

Key Concepts of Sole Proprietorships

Key Concept

Description

Formation

Requires low start-up costs and minimal filing requirements. Typically a one-person business.

Liability

Sole proprietor is personally liable for all business debts. Personal assets can be pursued to satisfy business liabilities.

Capital

Proprietors may fund the business through personal savings, private loans, or commercial loans.

Taxes

All business income is taxed at the proprietor's individual tax rate; reported on personal tax return. Includes miscellaneous state and local taxes applicable to business operations.

Management and Control

Sole proprietorships are managed entirely by the sole proprietor for full control.

Designation Example

John Doe d/b/a Doe Consulting Services demonstrates a typical naming convention for a sole proprietorship.