A Limited Liability Partnership (LLP) may request closure and removal of its name from the LLPs Register from the Registrar if it has not conducted business since its establishment or has terminated/stopped conducting business for a period of one year or longer.
If the LLP has become dormant, it is preferable to close it rather than comply with all of the requirements; it is also preferable to close rather than pay a fee or penalty if the LLP is inactive. Closing an LLP can have a number of benefits for an organisation that designs its business structure. This article focuses on what closing an LLP means from a legal perspective.
Who Is a Closing Partner?
When one or more partners in an LLP form a separate LLP, they’re called a “closing partner” or, in other words, the limited partner who completes the transaction to form the LLP. In most cases, this is a passive transaction, where the closing partner executes the agreement and signs the paperwork on behalf of all the other partners.
However, there are a few limited situations where the stakeholder who completes the transaction to form the LLP is actively involved. Such cases include the formation of a wholly-owned subsidiary and the acquisition of certain types of assets. In all other instances, the transaction is simply a legal construct to form a new entity with limited liability that is identical or substantially similar to the partnership that was dissolved.
What Does Closing an LLP Mean for an Organisation?
If your business uses an LLP model, there are a few key takeaways that pertain to the organisation as a whole.
- First, the end goal of a closing is to eliminate the need for any documentation or transaction that exists between your business and your shareholders, other than the formal formation of a new company. This process is often referred to as a “closing” and it is meant to eliminate any existing distinctions between the two entities
- The end goal is to remove any barriers that were previously in place that may have stifled your business’s growth.
Scenarios Under Which a Limited Liability Partnership (LLP) Can be Terminated
- It has been inactive for at least one year since its incorporation.
- It has no assets or liabilities at the time of application.
- The LLP’s current account has been closed.
- Every party, whether a creditor, authority, or partner, has agreed..
Process of Closing an LLP
The basic process for closing an LLP is as follows:
- The one or more partners in the LLP sign a closure agreement
- A notary public witnesses the signing of the closure agreement
- The assets constituting the business are transferred to the new entity, which is treated as a partnership for tax purposes
Advantages of Closing an LLP
The main advantage of closing an LLP is that it eliminates any distinctions between the general and the limited partner businesses. This is because all aspects of the new company are treated as being done by the same entity.
As a result, there are no longer any boundaries between your general and limited partnerships. This leads to an increase in the overall flexibility of your business as you can now form an LLP in any state.
Disadvantages of Closing an LLP
- The main disadvantage of closed partnerships is that there is no way to share in the profits from the activities of the members of the partnership. This means that if one partner profits from the partnership’s activities, the entire partnership suffers.
- There are some consequences for how an organisation is structured as well. A joint venture, for instance, cannot exist with a CLOSED partnership.
Likewise, there are implications for the way that the members of the partnership interact. If members of the partnership want to make major business decisions, they must all be voted on by the members of the partnership. This could not be ideal because it might result in a lack of transparency.
The closing of an LLP may have several advantages for an organisation that has its business structure set up to eliminate the distinction between its general and limited partner businesses. The main advantage is the elimination of all the documentation and financial transactions that existed between the two entities. This, in turn, allows the owner shareholders to have full control over the business’s operations, including the ability to start or acquire a competing company.
As with any business structure, the key here is to make sure that the benefits of forming an LLP outweigh the potential disadvantages. Make sure that the advantages of a closed partnership over a unique entity like an LLP outweigh the disadvantages of a closed partnership.
After careful consideration, it has been determined that the benefits and disadvantages of closing an LLP compared to the incorporation of a traditional business are minimal.
The Bottom Line
The decision to close an LLP is an important one, but should be made carefully since the effects can be significant. The professionals at Vakilsearch can assist you with this. Vakilsearch’s business professionals assist partnership firms in founding and winding up their operations, assuring a complete and straightforward closure.