We have come across several cases where the business owner asks us about how to deal with the company or LLP that was incorporated some time back and now the business is no longer running or in many cases, the business didn’t even start at all.
If you have incorporated a company in India which is no longer needed. Either the company was inactive from the beginning, or it operated for a few months, then you realize that opening the company was a mistake.
Now the catch is, it is easier to form a company or LLP in India & equally difficult to close the same. So, how to deal with such a business? Because you can’t just leave it otherwise it will become non-compliant & even more importantly, the directors, Partners, founders will also become non-compliant. If not dealt with properly, it might affect your current or future business ventures.
So, the question is how to deal with such a situation?
Broadly, we have 3 options:
A. Closing the business.
B. Selling the business.
C. Keep running the inactive business.
Let’s discuss each option separately:
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A. Closing The Business
As stated earlier, it is easier to form a company or LLP in India & equally difficult to close them because one needs to fulfill certain conditions before they become eligible to close the company or LLP.
Conditions for closing a private limited company:
i) The company should be inactive, i.e.
- Either the company failed to commence the business within one year from the date of incorporation, or
- The company has had no operations for two consecutive past years.
ii) It should not have any unsettled assets or liabilities.
Conditions for closing a LLP:
i) The LLP has ceased conducting any business or operations for a duration of one year or longer.
Important points to note:
- If one wants to close a company which wasn’t inactive from the beginning, they must keep the company or LLP compliant & file all necessary returns.
- There shouldn’t be any unsettled tax liability.
B. Selling The Business
This could be one of the most viable & practical solutions in many cases. If you have a running LLP or company, which you no longer wish to operate, you could sell it to somebody who is looking to set up a business and looking forward to doing it in an already running business.
In this option, a company or LLP is sold to an interested buyer. This saves the existing owner from the technicalities & compliances involved in keeping the business running and the intended buyer gets the waiver to start the business afresh with a newly incorporated company or LLP.
Technically, there are no conditions to sell a company or LLP. One just needs to ensure the transfer is done amicably keeping in mind the existing regulations around it:
- Proper execution of business transfer agreement
- All existing obligations of the company or LLP must be dealt or settled with
- Settlement of tax implications on the transfer of business, if any.
- Compliance affecting the change in the shareholders/partners.
- Compliance affecting the change in the registered address.
- Compliance affecting the change in the powers & objectives of the company.
- Compliance affecting the change in the name, if required.
- Transfer of tax registration
C. Keep Running an Inactive Business
This is the last resort, which is usually adopted when the owners are not sure if they will need the company or LLP in future. So, owners do not close or sell the business. They just keep it alive to run the business in future.
One of the most important thing to keep in mind if one is opting for this option is to keep the company or LLP compliant w.r.t to the returns that are required to be filed periodically otherwise they might face difficulty in resuming any business in such company or LLP.
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The author is a CA in practice at Delhi and can be contacted at: E-mail: abhinandansethia90@gmail.com, Mobile: +91-9811741451
Disclaimer: The above post is only for the purpose of academic discussion and should not be construed as any legal opinion in any matter whatsoever.
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