Limited Liability Partnership

Know the LLP Closure Advantages and Disadvantages

In a case where a Limited Liability Partnership, also called an LLP, becomes dormant, it is advisable to move forward with the LLP closure process. In order to execute a legal and successful closure, one has to follow the prescribed procedure. Undertaking such a process will save you from paying hefty fines and penalties in case of non-compliance. The closure of an LLP can be beneficial, but there are also certain disadvantages. We will discuss both in this article. But before that, let’s have a brief overview of LLP.

What is an LLP?

Limited Liability Partnership or LLP is an alternative form of corporate business. It offers the advantage of limited liability to the firm’s partners at low compliance costs. LLP allows its partners to organise the internal structure, similar to a traditional partnership. An LLP helps the entrepreneur to run an efficient business model in its early days, it offers all the benefits of a partnership business to the business along with certain features of a company.

It is a legal body that is liable to the extent of its assets; however, the liability of the partners is limited, thus making it a hybrid between a company and a partnership.

When can an LLP be closed?

The LLP closure process can be followed when the LLP has been inactive for a minimum of one year since its incorporation. It can be successfully closed down when, when making an application for closure, it doesn’t have any liabilities and where the current account of the firm has been closed. Finally, it can be closed when the creditors, partners, and authorities agree with the LLP closure process.

So, an LLP can apply for closure in case it was inactive for the entire 1 year and in the case where it has not begun its business after the incorporation of the LLP.

Further, in case the business owners can also apply for closure where the LLP has gone bankrupt. Also, the LLP must be closed upon receiving an Order from the Court. This could be due to any circumstances which caused the Court to order the LLP’s closure. 

Methods of LLP Closure

There are different ways in which an LLP can be closed. One is by declaring the LLP defunct, and the other is by winding up the LLP.

Declaring an LLP Defunct

If the LLP desires to close its operations and business or in case where it is not carrying out any business for one year or more, it may approach the registrar of companies seeking to declare the LLP as defunct. It will lead to the removal of the name of the LLP from its register.

Striking off the name of the LLP can be executed under Rule 37 of the LLP Rules of 2008^[1]. The registrar can strike off a defunct LLP after being satisfied that it should be struck off and where there is a reasonable cause. However, in such cases, the registrar should send a notice to such LLP and direct them to send a representation within a period of a month from the notice.

The registrar will publish the notice or the application’s content on its website for 1 month, informing the public about the prospective action.

If there is no reply from the concerned within the prescribed period, then the registrar may move forward with striking off the LLP.

Winding Up

The winding up of the LLP is also governed under the LLP Act 2008. In such a process, all the LLP assets are disposed of to cover the liabilities. In case of a surplus, it is distributed among the business owners. Winding up can be carried out in Voluntary and Compulsory winding up.

Voluntary Winding Up- Under this form of LLP closure, the partners of the LLP can decide among themselves to stop the operations of the LLP. Voluntary winding up of business can be availed by the partners, due to the following reasons;

1. Business Hiccups/ Unable to manage the business operations
2. Non profitability of the business
3. Unable to meet the financial commitments
4. Death/Exit of a Partner
5. If the partnership is formed for a limited purpose

Compulsory Winding Up- An LLP will have to be compulsorily wound up in a case where the LLP decides that a Tribunal wind it. Further, if the number of partners in an LLP falls below two for six months or more, then the LLP must wind up its business. In a case where the LLP is unable to pay off its debts, then the LLP has to wind up its operations compulsorily.

Moreover, if an LLP acts against the country’s interest or operates detrimental to the state’s security or public order, it shall be ordered to wind up such an LLP.

The LLP making a default in filing the statement of account with the registrar or an annual return for five consecutive years or where the Tribunal believes that it is equitable to wind up a company, then such a Limited Liability Partnership shall be wound up. 

Impact of LLP Closure & its Advantages

Those business owners who choose the LLP model later may close down the LLP by following the formal process of LLP closure. This is done to eliminate the documentation or transactions existing between the business and the shareholders. The closing process helps to remove any existing confusion between the old and new corporation.

It helps remove the barriers that stifle the growth of the newly formed business. The business owners can completely focus on their new project once the old firm is closed. The business owner can be at ease not getting burdened with penalties or fines in case of non-compliance.

The statutory compliance requirements of an LLP and managing the LLP can become cumbersome and expensive for an entrepreneur. In case there is no sizeable profit through the LLP, then it is advisable to go ahead with the process of LLP closure.

The distinction between the general and limited partnership is eliminated by closing the LLP. It results in the same party taking care of the essential aspects of the newly formed company. It eliminates the boundary between your general and limited partnership.

So with LLP closure, you can be compliance free as you don’t have to keep track of the compliance chart as the company will be dissolved. Further, when the closure process has been initiated, the company doesn’t need to worry about penalties or fines in case of non-compliance.

Another benefit of closing an LLP is that legal action is halted once a company closes its operations.

Lastly, by closing down an LLP, the business owner can invest his money, time and resources into the fresh project he or she seeks to start. It will allow the person to make a profit and curb additional expenses in respect of the old company.

Disadvantages of LLP Closure

The partnerships moving ahead with the closure procedure must know that it is challenging to execute the closure process. There are various forms that must be filed before the concerned authority. There are also multiple tasks that are required to be completed before the company can be closed. Further, numerous documents must be complied with and filed before the authority for such a process. Once all these requirements have been met, and all the compliance requirements have been fulfilled, then only the LLP can be formally closed down.

Further, another disadvantage of LLP closure is that the organisation’s structure can also be affected.

Conclusion

LLP closure can benefit an organisation, allowing them to avoid complying with a slew of compliances required for LLPs. The requirement of maintaining documentation and records also is eased with the closure. This also ensures you can avoid paying huge penalties and fines for non-compliance. However, before going ahead with the process of closing an LLP, you should weigh the advantages and disadvantages of closing your LLP. You should proceed with the process if the benefits outweigh the disadvantages.

Read Our Article: Understanding the Provision Regarding Strike off of LLP