Starting a Limited Liability Partnership (LLP) in India is usually the first step for business founders seeking an option that gives them greater flexibility with limited liability protection. Unfortunately, many LLPs are never utilized after being established. Often, partners will choose not to operate their LLP because of insufficient funding, changes in business strategy or market, or due to personal conflicts amongst partners. If your LLP is registered but you have never opened a bank account and your LLP has not been active since registration, you may believe that you have nothing further to worry about in terms of compliance. Unfortunately, under Indian law an inactive LLP still has some statutory obligations to complete unless they have submitted a formal request for dissolution. This article outlines what happens to an LLP if the registered LLP is not dissolved by the founding parties, including both the legal and financial ramifications, as well as how to dissolve LLP's that have not been operated at any time.
Understanding the Legal Status of an Inactive LLP
Many Limited Liability Partnership (LLP) Partners commonly believe, incorrectly, that if the business is either never started, or ceases operations, compliance ceases to exist automatically. This misconception is incorrect. Once an LLP is registered with the Ministry of Corporate Affairs (MCA) it becomes a separate legal entity. An LLP can be considered a legal entity whether or not:
An LLP will remain a LEGAL ENTITY until such time as it has been formally closed or removed from the Register of LLPs. This means that all legally prescribed obligations as listed in the LLP Act of 2008 must continue to be observed by the LLP.
Legal Framework Governing LLP Closure in India
To understand why it is important to close a Limited Liability Partnership, it is necessary to examine the laws that govern Limited Liability Partnerships (LLPs) in India.
In India, Limited Liability Partnerships (LLPs) are subject to the provisions of:
According to the Limited Liability Partnerships Act of 2008, an LLP will remain in operation under the law until either:
Simply ceasing all business-related activities does not automatically dissolve the LLP; as long as it remains on the register, both of the partners are required to submit all annual filings as per the provisions of the law.
Mandatory Compliances Even If Your LLP Is Not Working
All LLPs, regardless of their operational status, must complete annual filing obligations (i.e., annual returns, statement of accounts/solvency). These obligations apply even if the LLP has not generated any revenue or is inactive.
1.Form 11 (Annual Return):
All LLPs must complete Form 11 each year and provide information about partners in the LLP, including any changes to partner information.
• All annual returns are due on or before May 30.
• Annual returns must be completed annually, regardless of whether the LLP engaged in business activity.
2. Form 8 - Statement of Accounts and Solvency:
Form 8 includes:
• Statements of Solvency
• Statement of Accounts
Even if your LLP does not have any income and incurred no expenses, Form 8 must be completed and filed annually.
• All completed Form 8s are due on or before October 30.
3. Income Tax Return (ITR):
An LLP is also required to file an ITR regardless of whether:
• The LLP does not have a bank account/checked and deposits.
• The LLP has received no income.
A nil return must be submitted annually, regardless of whether there was any income.
What Happens If You Stop Filing Returns?
If your LLP has ceased operations and filed only for its first two years, various consequences of not complying will build cumulatively without notice.
1.Significant Daily Charges for Late Filings
The penalties imposed on LLPs for the filing of annual returns (that are overdue) are very strict and in theory could continue indefinitely:
As time continues to be added, accumulated penalties could amount to more than it costs to dissolve a Limited Liability Partnership (LLP).
2. The LLP is Considered "Defaulted"
The Ministry of Corporate Affairs (MCA) lists all LLPs that do not file returns as "defaulted" on its portal. Being marked as such has several ramifications:
3. Risk of Disqualification for Partners
While the LLP Act does give partners more leniency than the Companies Act, continued failure to comply will ultimately:
4. The ROC Can Issue Notices and Take Legal Action
The Registrar of Companies (ROC) has authority to:
Failure to respond to these notices could lead to very serious issues.
Does Not Opening a Bank Account Make Any Difference?
A large number of the owners of an LLP assume they are not required to comply with regulations until the LLP opens a bank account. However, this assumption is incorrect as it is the date of registration on your LLP Registration Certificate that establishes the date that your LLP was formed, not when you open a bank account, or when you began conducting business with the LLP.
Accordingly, regardless of whether:
Your LLP will remain a legal entity until you formally close it.
Why You Should Not Ignore an Inactive LLP
Although there may not be many short-term effects of leaving an inactive LLP by itself for a long period of time, it does cause numerous risks to your finances in the long-term.
Increased Financial Burden as Time Goes On
Penalties accruing in years will add up and, if you do not pay them off at some point, you could incur large amounts for the penalties upon final resolution.
Increased Difficulty Closing in the Future
The longer you put it off until now:
• You will have more pending filings
• The higher the cost of regularizing your good standing will be
• The closing of your LLP will be increasingly complex
Negative Impact on Future Business Plans
If you decide to:
• Create a new LLP or corporation
• Request financing or loans, or
• Enter into business partnerships
Having a defaulting LLP under your name will create obvious problems for you.
Options Available for an Inactive LLP
If you have not been using your LLP since registering it, you generally have two choices available to you:
Option 1: Regularize All Pending Filings
This involves:
• Submit all overdue Form 11 and Form 8.
• Pay any penalties due.
• Submit your overdue Income Tax returns.
This option should only be chosen if you're planning on using the LLP again.
Option 2: Close the LLP Formally (Recommended)
If your LLP is not performing any business and you don't intend to use it again, formally closing LLP Company in India is by far the cheapest and safest legal option.
Process of Closing LLP in India
Every Limited Liability Partnership (LLP) has its own way to shut down based on whether or not they owe any money or if they are involved in any disputes. For the most part, it is fairly easy for an LLP to dissolve when they are no longer conducting business and do not have an active bank account or any other assets.
Step 1: Determine if the LLP is Eligible to Strike-Off
An LLP can strike-off after fulfilling these requirements:
• Had no business activity for at least 1 year
• No Assets or Liabilities
• There is consent for closure from all partners
Step 2: Clear Pending Filings with the MCA
Before filing,
Step 3: Close All Bank Accounts (If applicable)
If your LLP opened and had an active bank account at any time, you must close any and all accounts prior to making the filing. This may not apply to you.
Step 4: To the Registrar of Companies (ROC), file Form 24
File Form 24 to the ROC together with the following documents:
• Partner’s Affidavits
• Indemnity Bonds
• Certified Statement of Accounts from a Chartered Accountant
Step 5: Wait for ROC Approval
Once the ROC is satisfied, they will:
• Strike off your LLP Name
• Dissolve your LLP
Upon completion of the approval, there will no longer be a LLP legally.
Benefits of Closing a Limited Liability Partnership Properly
Closing an LLC/LP in a lawful manner has many advantages, even when the entity is not active.
1.Full Legal Termination
When you close your LLC/LP, you will no longer be liable to pay tax on its income as it will no longer exist under the laws of your state/country. All partners will no longer have any ongoing obligations to file taxes or report to any government agency regarding their interests and investments in the LLC/LP.
2. Avoid Penalties
If you act quickly to close your LLC/LP you will be avoiding the following potential costs:
• Late penalties
• Unpaid taxes
• Cost of stress from unpaid taxes and/or late penalty notices
3. Clean Compliance History
Closing your LLC/LP properly means that you can have a clean compliance history when looking at your work and how it relates to future businesses you will operate.
4. Less Worry
With a close LLP service, you will not have to worry about unexpected penalties and/or unresolved notices.
Consequences of Not Closing an Inactive LLP
An LLP that is inactive and has not formally closed remains responsible for fulfilling statutory requirements. Below are the primary results of this status:
1.Financial Penalties for Failure to Comply
An LLP that has not been engaged in any operations will have to complete the following forms, despite its lack of business activity:
• Form 11 (Annual Return) - Reporting on business partners and their operations as the LLP owner(s).
• Form 8 (Statement of Accounts & Solvency) - This form provides detailed financial reporting of the LLP, even when it is not engaged in any operations.
If you do not file any of these forms, then you may incur penalties under the LLP Act. Currently, if you do not file a particular form, then you will incur a penalty of ₹100 each day for that form. Over time, this will add up to a large amount that must be paid back to the government.
2. Legal Liability for Partners
All the partners of an LLP will also be held liable for noncompliance. If the LLP does not file the above forms with the Registrar of Companies (RoC), then the RoC can take action against yourself and/or the LLP. While limited liability protects your individual asset(s) from debts accrued as a result of the LLP operating, noncompliance with August 2023 filing requirements may convert your limited liability into personal liability for penalties owed due to the LLP's failure to comply.
3. Difficulties with Future Business Ventures
If your LLP has compliance issues, it can hurt your credibility in pursuing future business opportunities. Potential lenders, investors, and government authorities will usually investigate the history of compliance of you and your past LLPs/companies before deciding if they want to work with you. If you are not still operating your LLP and you have missed filing deadlines with the RoC, this will raise potential red flags for lenders/investors when they look into your LLP.
4. Notices from the Government
The RoC will send you notice and reminders about your missed deadlines with them. If you ignore these notices, the following will happen:
• The RoC will remove your LLP.
• The RoC will impose additional penalties and fees.
• You may also have legal issues if you attempt to reinstate your LLP at a later date.
Common Mistakes to Avoid While Closing an LLP
Ensuring that these common mistakes are avoided will help to provide a smooth procedure when closing your LLP.
Common Myths About Not Closing an LLP
Myth 1: Non-working LLPs are automatically closed
Reality: LLPs remain active unless formally closed.
Myth 2: No bank account means no compliance
Reality: Legal compliance applies regardless of transactions.
Myth 3: Penalties won’t apply if there is no income
Reality: Penalties apply for non-filing, not income.
Conclusion
Your LLP continues to exist legally. Your continuing obligations to your LLP are present. If you were to ignore your LLP, you would then be subject to potential future penalties, compliance obligations, and legal consequences. The best option available to you from a financial and practical perspective is to identify the specific facts and circumstances surrounding your LLP and to use these facts and circumstances to develop a plan for a structured exit from the LLP. Once you have completed the appropriate steps to close your LLP, you will have eliminated the ongoing reporting and recordkeeping obligations associated with your LLP and maintained your professional credentials and opportunities for future business activities. If you wait until the future to begin this process, you will incur significant additional costs, time, and risk in closing your LLP.
Frequently Asked Questions (FAQs)
1. Can an LLP be closed if it never started business?
Yes. An LLP that never commenced operations can be closed through strike off, provided it meets eligibility conditions and clears pending compliances.
2. Is it mandatory to file returns even if there is no income?
Yes. LLP annual filings and income tax returns are mandatory, even for zero income or inactive LLPs.
3. What happens if I ignore my inactive LLP for many years?
Penalties accumulate without limit, and the LLP may face legal action from the ROC. Closing later becomes more expensive and complicated.
4. Can the ROC close my LLP on its own?
Yes. The ROC has the power to strike off defunct LLPs suo motu, but penalties and consequences may still apply.
5. Is strike off better than keeping the LLP dormant?
If there are no future business plans, strike off is usually better as it eliminates compliance costs and legal risks permanently.
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