An individual operating a business as a sole proprietor may unintentionally leave unpaid debts to his or her estate. According to the IRS, a sole proprietor owns and operates a business alone without partners. A single individual also has responsibility for income taxes and debts incurred as part of his or her business.
As explained by Entrepreneur.com, an owner may sign contracts and take on loans. If an agreement remains unpaid, however, creditors may sue the owner personally to recover. They may also recover from the owner’s estate.
An unexpected death may pass debts to an owner’s estate
As noted by Chron.com, a business’s outstanding liabilities may settle through the deceased’s estate when a sole proprietor unexpectedly dies. The business’s assets may go through probate along with the other properties the deceased listed in a will.
In probate court, the estate’s executor may run into financial issues such as resolving a sole proprietor’s outstanding loans. Creditors may contest heirs for business debts that an owner personally promised to pay. The executor may also use assets from the estate to pay taxes from a sole proprietor’s income.
A sole proprietor’s death typically results in a business’s end
When a sole proprietor dies, his or her business typically dissolves. An owner may also include assets in a will and list an heir to take ownership of them. Under certain circumstances, a sole proprietor may need to establish a separate legal entity to transfer ownership to an heir.
Business succession is an important component of estate planning. Without the existence of surviving partners or having formed a separate legal entity, a sole proprietor may pass on business loans, debts and taxes to heirs. A will or other legal instrument, however, may help to prevent an estate from taking on the deceased’s outstanding liabilities.