What if things go south? How to shutdown Pvt Limited or a LLP Business in India

[Editorial Notes: As part of our series on LLP vs. Private Limited, here is an important area to know while you are deciding on company legal incorporation.

Earlier in this series: Problem of Plenty– Choosing How to Startup [PART 2], LLP vs. Private Limited: How to Choose Company Incorporation]

Agneepth - An Entrepreneurial Journey
Agneepth - An Entrepreneurial Journey

I am entering into a high risk, high return business. Although we have decided to start it, we are not sure about the right mode of business formation to use. We would like to form a private limited company, obviously, but I am concerned that a private limited company will be more difficult to wind up in case things go south. What do I do? Should I form an LLP?

It seems here that you are debating between a Company and an LLP, and your doubt is as regards which is easier to shut down in case things don’t work out the way you want them to.

To clear the air a little bit, find here a detailed procedure on how to wind up a Company and an LLP. A partnership or a sole proprietorship is much, much easier to shut down. An unregistered partnership or proprietorship can be shut down by merely closing the bank account of the partnership or proprietorship.

 

Procedure for Voluntary Winding up of a Company

 

Step 1: A special resolution has to be passed by the Board and the members

Step 2: Within fourteen days of the passing of the resolution, a notice of the resolution by advertisement in the Official Gazette, and also in some newspaper circulating in the district where the registered office of the company is situated. (If default is made in complying with this clause, the company and every officer of the company who is in default shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues.)

 

Step 3: The Business activities are to cease the day the resolution is passed.

Step 4: The directors have to make a declaration verified by an affidavit, that they have made a full inquiry into the affairs of the company, and that the company has no debts, or that it will be able to pay its debts in full within three years from the commencement of the winding up.

Step 5: The above declaration has to be made and submitted to the registrar within 5 weeks (35 days) of passing the resolution for winding up along with the auditor’s report for the most recent financial period.

Step 6: The members have to appoint a liquidator to distribute the assets and pay off the liabilities.

Step 7: The registrar has to be notified about the appointment (or resignation) of the liquidator in writing.

Step 8: If the dissolution takes more than a year, the liquidator is to hold a general meeting at the end of every year giving the report of the dissolution process and progress with accounts. The same is to be done even on the final meeting for dissolution.

Step 9: The minutes of these meetings should be submitted to the registrar as usual.

 

Voluntary Winding of an LLP

Step 1: Any LLP may be wound-up voluntarily if the LLP passes a resolution to wind up the LLP with approval of at least three-fourths of the total number of its partners.

Step 2: A copy of the resolution shall be filed with the Registrar within thirty days of passing of such resolution in Form No. 1 of the LLP Rules, 2010.

Step 3: The majority of its designated partners (being not less than two) shall make a declaration in Form No. 2 LLP Rules, 2010, in an affidavit saying that the LLP has no debt or that it will be able to pay its debts in full within one year from the commencement of the winding up.

Step 4: The above Form and affidavit are to be submitted to the registrar within 15 days of the resolution along with form 3 of the LLP Rules, 2010, a statement saying that such winding up is not being done to defraud anyone, form no .4 of the LLP Rules, 2010, and a report of the value of the assets of the LLP.

Step 5: Consent needs to be obtained from atleast 2/3rds of the creditors in terms of value.

Step 6: The Creditors consent is to be filed with Form no.5 of the LLP rules, 2010.

Step 7: Within fourteen days of the receipt of creditors’ consent, give notice of the resolution by advertisement in a newspaper circulating in the district where the registered office or the principal office of the LLP is situated.

Step 8: The partners then have to appoint a liquidator within 30 days of receiving creditors consent.

Step 9: This liquidator is to file a declaration in form no.6 of the LLP rules, 2010.

Step 10: After all formalities are over, final accounts of the LLP are to be submitted with form no.9 of the LLP rules, 2010.

Conclusion: From the facts presented above, it does appear quite clear that there is not much of a difference with regard to ease of winding up between an LLP and a Private Limited Company.

A Private Limited Company brings certain other advantages, such as the ability to issue stock options, appoint independent directors, dilute stake to investors and valuable employees and a lot more. The law on Companies is also far more mature, since the Companies Act was passed almost 60 years ago.

 

So if ease of winding up is your major concern, form a Private Limited Company.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

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