Limited Liability Partnerships (LLPs) have become a popular business structure in India due to their flexible management structure and limited liability protection for partners. However, there may come a time when an LLP is no longer active or viable, and closing it becomes necessary. Winding up an LLP in India involves a systematic procedure that must comply with the provisions of the LLP Act, 2008, and other regulatory requirements. This guide will walk you through the process of closing an LLP.
Reasons for Closing an LLP
- Business Inactivity: When the LLP is no longer conducting business or has become dormant.
- Financial Losses: Continuous losses that make it unfeasible to run the business.
- Disputes Among Partners: Irreconcilable differences between partners that hinder business operations.
- Voluntary Decision: The partners may mutually decide to wind up the LLP.
- Regulatory Non-Compliance: Failure to comply with statutory requirements, leading to penalties and making closure a better option.
Methods of LLP Closure in India
There are two primary ways to close an LLP in India:
- Voluntary Winding Up: Initiated by the partners when they decide to close the LLP.
- Compulsory Winding Up: Ordered by the Tribunal under specific circumstances such as fraud, insolvency, or default in filing statutory returns for five consecutive years.
Step-by-Step Procedure for LLP Closure
1. Voluntary Winding Up of LLP
Step 1: Consent from Partners
- Obtain the consent of all partners to initiate the closure process.
- A resolution must be passed with at least three-fourths of the partners agreeing to wind up the LLP.
Step 2: Settlement of Debts and Liabilities
- Clear all outstanding debts and liabilities.
- Obtain a No Objection Certificate (NOC) from creditors if applicable.
Step 3: Filing of Form 1 (Notice of Decision to Wind Up)
- File Form 1 with the Registrar of Companies (ROC) within 30 days of passing the resolution.
- Attach the resolution and consent of partners.
Step 4: Appointment of a Liquidator
- Appoint a liquidator to manage the winding-up process.
- The liquidator’s responsibility includes selling assets, settling liabilities, and distributing the remaining assets among partners.
Step 5: Preparation of Final Accounts
- The liquidator must prepare a statement of accounts showing how the LLP’s assets have been managed.
- Partners must approve the final accounts.
Step 6: Filing of Form 9 (Final Statement of Accounts)
- Submit Form 9 along with the final accounts and a report of the liquidator to the ROC.
Step 7: Dissolution of LLP
- If the ROC is satisfied with the documentation, they will issue a notice for the dissolution of the LLP.
2. Closure through Form 24 (Fast Track Exit Mode)
Step 1: Eligibility Check
- Ensure the LLP has not conducted any business for at least one year.
- All pending returns and compliance filings must be cleared.
Step 2: Settlement of Liabilities
- Settle any outstanding debts and obtain NOCs from creditors.
Step 3: Filing of Form 24
- File Form 24 with the ROC along with the following documents:
- Consent of all partners.
- Statement of accounts showing no liabilities.
- Affidavit and indemnity bond from partners.
- Copy of the latest Income Tax Return (if filed).
Step 4: ROC Review and Approval
- The ROC reviews the application and may request additional documents if needed.
- Upon satisfaction, the ROC will issue a notice of striking off the LLP from the register.
Documents Required for LLP Closure
- Resolution for winding up.
- Statement of accounts and solvency.
- Affidavit and indemnity bond from partners.
- No Objection Certificate from creditors.
- Income Tax Return acknowledgment (if applicable).
- Copy of LLP Agreement.
- Consent of designated partners.
Timeframe for LLP Closure
The time required to close an LLP varies depending on the method used and the accuracy of documentation. Generally, it takes around 3-6 months for voluntary winding up and 2-3 months for closure through Form 24.
Common Mistakes to Avoid During LLP Closure
- Incomplete Documentation: Ensure all required documents are correctly prepared and submitted.
- Unsettled Liabilities: All debts and obligations must be cleared before initiating closure.
- Non-Compliance with Statutory Requirements: Ensure all filings and compliance requirements are met to avoid delays.
- Ignoring Partner Consent: Obtain written consent from all partners before proceeding with the closure.
Consequences of Not Closing an Inactive LLP
- Penalties and Fines: Non-filing of statutory returns can lead to heavy penalties.
- Legal Liability: Partners may be held liable for any legal issues arising from the inactive LLP.
- Difficulty in Future Business Ventures: Unclosed LLPs may affect the partners’ creditworthiness and ability to start new businesses.
Conclusion
Closure of LLP in India requires following a structured procedure in compliance with legal requirements. Whether you choose voluntary winding up or the fast-track exit route through Form 24, proper documentation and timely action are essential for a smooth closure process. By adhering to the correct steps and ensuring all liabilities are settled, partners can efficiently wind up their LLP and focus on new opportunities.