IRS Rules for Dissolving a Sole Proprietorship

The Internal Revenue Service can overwhelm the most responsible taxpayer with rules and regulations. Filing taxes for a business only increases the diligence required. If you are in business for yourself as a sole proprietor, you will typically file Schedule C in addition to your normal 1040 income tax return. However, if you dissolve your sole proprietorship, you do not have to report it to the IRS.

Sole Proprietorships

The IRS describes a sole proprietorship as an unincorporated business owned by an individual taxpayer alone. For tax purposes, there is no distinction between the business and the individual, although you may engage in business under a pseudonym or Doing Business As (DBA) type license.

IRS 1040 Schedule C

Sole proprietors ordinarily file Schedule C forms with their 1040 tax returns for a tax year in which there is either income or an expense associated with their sole proprietorships. You may file the form C-EZ for income from a sole proprietorship if you have only one business with less than $5,000 in expenses and no net loss. There are some additional considerations, so consult the instructions for Schedule C-EZ or a qualified tax accountant.

Closing or Reopening Your Sole Proprietorship

The IRS does not stipulate that you must notify it when you file the final return for a sole proprietorship. You simply must stop filing the Schedule C with your tax return. If you had no income and no expenses for the tax year, your business was inactive and you do not need to file Schedule C. If you reopen the business in a later year, you should check the box on line H of your Schedule C that says, "If you started or acquired this business during (tax year), check here."

If You Have Employees

You need to file additional forms for a sole proprietorship that has employees. You must check boxes on both the quarterly Form 941 and annual Form 940 that you use to file taxes for your employees. On Form 941, you will find the check box in part 3, and on Form 940 it is on the first page, as of 2010.