How to Close a Business, Note Some Legal Points..

Here are some of the legal points you need to keep in mind to ensure that you make a clean exit.

by Mr. SAKINA BABWANI

When an entrepreneur sets up his / her dream venture,the last thing on his / her mind is looking for ways to wind up the business. Despite the rosy projections you may have about your pet enterprise, it helps to indulge in a dose of reality.

Pune-based Ms. Deepa Mehta learnt this the hard way.In 2007, she set up a website design firm in partnership with her childhood friend, but barely 5 years later, she was forced to shut shop. My husband was transferred to another city, so I wanted to opt out .However,i t was not easy since we had no clue how to go about it. We wasted valuable time searching for a lawyer and working out a deal that suited both the partners, she says.

One of the most important things that a business blueprint must include is an exit policy, says Mr. Aakansha Joshi, a senior associate with law firm, Economic Laws Practice. You never know when you may have to use it, she adds. Heres a look at the ways of dissolving different types of business structures.

Sole proprietorship..

This form of business is the easiest to close. Since it is not governed by any statute, you can wind it up whenever you like. However, you still need to settle your accounts, including the liabilities and outstanding credit, from the funds generated by the business. Remember, if its a loss-making business, creditors can stake a claim to your personal assets to recover their money.

If you are not in a position to pay your liabilities, explore the option of filing for insolvency under the provisions of the Insolvency Act. In such a case, your creditors will be redirected to the court, which will decide how the debts are to be settled.

Partnership firm..

 

The dissolution of a partnership is more complex since various partners are involved. If, at the time of forming the firm,the partners agree upon the conditions under which the firm is be dissolved,this is incorporated in the form of a contract. Whenever such conditions arise, the firm is automatically dissolved.

If, however, there is a dispute among members, any partner can file a case in the court, which then decides on the dissolution. If there is no contract between the partners regarding the ending of partnership, any partner can give a notice for its termination, following which the partnership comes to an end. Where there are only 2 partners involved, and one of them dies, becomes permanently disabled, or / mentally deranged, the firm is automatically dissolved.

Of course, you will have to settle your finances before closing down. As in the case of a proprietorship, creditors can proceed against the individual partners assets to recover their loans, unless it is a limited liability partnership.

Franchise..

The grounds for terminating a franchise are usually incorporated in an agreement. The franchiser can terminate the contract  if any of the operating procedures, as stated in the agreement, are violated. Even you can end the contract by sending a written notice to the franchiser, informing him of your intention to not continue with the franchise.

Alternatively, you can sell the franchise to a third person,but make sure that

your contract with the franchiser permits you to do so.If not,you could lose out on the compensation that you may be entitled to.As in any other type of organisation,it is your responsibility to settle the finances.

However, if you have declared yourself bankrupt, the franchiser himself is likely to terminate your contract. Similarly, if you are unable to pay your employees or maintain the required health & safety standards, the franchiser reserves the right to end the contract.

Company..

 

Among the various types of firms, a companys closure is probably the most tedious. As it is governed by The Companies Act, there is a standard procedure in place for winding up a company. It can be done either voluntarily or/  by a tribunal.In the case of the former, the members pass a resolution in a general meeting, stating the reasons for doing so. If the company is in a position to pay its debts,it must state that it will do so within three years of closing.

Under certain circumstances, such as a default in delivering the statutory report or the company failing to commence its business within a year of incorporation, a company is closed down compulsorily. When a company is unable to pay its debts, the dissatisfied creditors can file a winding up petition against it.

Once the company has been dissolved, the court appoints a liquidator to take charge of the company. He collects the companys assets, settles the debts, and distributes the surplus, if any, among the members. Once the company has been dissolved, its name is struck off the register of companies.

Trust..

As the settler of a trust, you can list out the conditions under which it will be terminated. Once the trust is wound up, all its assets are to be distributed among the beneficiaries, or /  settled in any other way, as stated in the trust deed. You will have to notify the trusts bankers, who can then close the bank accounts. Besides, a final account will have to be drawn for the trusts liabilities,if any.

From ET Wealth

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