How to Close Proprietorship Firm In India |Winding Up Process for Sole Proprietorship:
In the Indian legislation, it is nowhere mandatory for a sole proprietor to initiate business only after obtaining a particular registration from any authority but certain procedural formalities do exist. Subjecting to the nature and the type of business activities performed, a sole proprietor has to only obtain few licenses and undergo registration approvals under certain laws including the Shop and Establishment Act, Factories Act, GST Registration, etc..
But rules regarding the closure of a sole proprietorship business is different.Before going into dissolution, it is essential for a proprietor to understand all obligations and liabilities of his entity and of himself as the sole proprietor to fulfill before the final closure of the business.
If you are a sole proprietor and have taken a final decision of closing down your proprietorship business permanently, then follow the below guide to close it with all legal affirmations.
- Common Reasons for Closure of Sole Proprietorship
Legal closure of business in India is an essential step to be taken to avoid future complications and legal arbitrations, which otherwise be faced if the business is closed without notifying government authorities.
Some common reasons for the closure of sole proprietorship business can be :
Bankruptcy/Death of the Sole Proprietor: Business can be put to an end on bankruptcy or death of the sole proprietor where it cannot be transferred to any other person or the business could not pay off its existing debts.
Legal orders issued against business: Business shall have to be closed on receipt of legal orders from legal authorities if they are of the view that business is illegal or unethical.
Failures or limited resources: For a sole proprietor, there is always a limited source for investment and finance. Holding business single-handedly, a proprietor has to manage his business with only a few sources he holds, failures in business due to limited resources can also lead to the closure of sole proprietorship.
Voluntary dissolution: With challenges faced by a sole proprietor, he may opt to close down his business permanently or on the advisory of a legal expert stating for no future prospects the business to grow.
- Steps for Legal Closure of Sole Proprietorship business.
- Delicensing of business :
The foremost thing for the closure of sole proprietorship business is to apply for cancellation of all registrations which the business holds and the formation of a business closure agreement which is to be sent to all authorities and parties associated with the business.
For necessary approvals and closure documents to be prepared, it is recommended to approach the state concerned authorities or take the help of a legal advisor.
Some common-licenses/registration to be canceled/surrendered:
- State Shop and Establishment Act license
- Intellectual property licenses
- Food license (FSSAI).
- GST Registration.
- Pollution or Industrial licenses
- Income Tax Registration.
- Sale of Assets :
Preparation of sale agreement and declarations from the parties buying assets is to be obtained to keep a legal record all asset transactions. Then all assets are to be sold with clearing all payments from the buyers.
- The settlement with creditors :
The final settlement agreement is to be formed with all employees, suppliers, lenders, and financial Institutions after making payment of their dues pending with the business or the proprietor, maintenance of such records is necessary so that they can be used in case any future obligation from any party arise.
- State authority approvals,
To legally declare for the closure of sole proprietorship, it is necessary to go through the approval of the appropriate state concerned authority on a legal agreement ensuring business stands closed in the eyes of the government.
Why wind up sole proprietorship legally?
- Legal Protection: if your proprietorship is closed on a positive note but without the approval of the appropriate State, central or concerned authorities, the business shall be under the obligation for compliances or liabilities which can arise in the future. Thus, receiving government approval and approval from concerned authorities eliminates business responsibilities from legal suits against business or proprietor.
- Easy Final Settlement: Going for dissolution of sole proprietorship through legal agreements with all creditors employees and parties associated with a business will help in better settlement of business obligations.
- Eliminate unforeseen liabilities: With the receipt of the certificate from a state or concerned authority for closure of business, the business will no more be called for any future liability.
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