Closing a Proprietorship

Why should I register as a Private Limited Company?

Since a sole proprietor reports to himself, he can close the business or sell it at will. The following are the conditions under which the proprietorship may be closed –

Death or Disability- Since the law makes no legal distinction between a sole proprietor and his business, the death of the owner effectively brings the business to an end. A representative of the owner or his family will then have to wind up the business.

If under any conditions the proprietor is unable to conduct business, this has the same consequences on the business as death. If possible, the owner should appoint someone to conduct the business on his behalf until he is better as this would allow the business to continue.

Bankruptcy- A sole proprietorship may also be dissolved in case of bankruptcy. In this case, assets will be sold off in order to pay the creditors. Creditors may also start an involuntary bankruptcy to protect their interests.

Other Circumstances – In the case a business outgrows the advantages of a sole proprietorship, the successful owner may want to incorporate in some way. The most common form of small business corporation is a Limited Liability Company (LLC). A new business identity is created by the proprietor by winding up the old business and incorporating and transferring its assets.

Steps to wind up a Proprietorship

  • Before winding up a proprietorship firm, there are some actions that need to be taken. The first is informing the employees (the employees need to be informed at least 60 days before business is wrapped up), followed by stopping business. Failing to give notice to employees may lead to legal issues.
  • Employees must be issued their final paychecks, Vendors and customers must be informed about the shutting down of business so that financial accounts can be cleared.This is a very important step because it helps settle the balance sheet.
  • A termination agreement must be made for closing proprietorship firm with the vendors. This agreement must include the last day of business and stating that business services will not be available after given date.This protects the business from future implications.
  • One of the most important steps is canceling business registration because this means that the license is terminated. This prevents any false allegations in the future. GST identification number must also be canceled so that false invoices of the business cannot be used. This can be done by going to the official GST website of GST and canceling it there.
  • Other licenses like Shop Act License also need to be canceled by visiting the municipality office/website. This is because every year the municipality charges fee for this license.
  • Any other licenses by the name of the business need to be terminated by applying for the cancellation.
  • Rental agreements in case of rented office space, electricity connections, water connections etc need to be canceled. If you have any equipment and machinery which will not work later can be sold off. Copies of those bills and cancellation documents need to be retained for tax purposes.
  • The current bank account of the business, chequebook, debit/credit cards etc all need to be canceled to avoid misuse/charges. This can be done by visiting the bank.

All the legal formalities of the IT department and GST department must be complied with and taxes need to be paid.