Gujaratis are known to be entrepreneurs who can think out of the box, but many often land up in a situation where a good idea dies prematurely for want of an effective revenue model.
This explains why scores of businesses shut shop within a short span of launching.
Now Registrar of Companies, Gujarat, has received applications from as many as 295 entrepreneurs who want to voluntarily shut down their dream projects.
And, all applications are from companies that fall under the Limited Liability Partnership (LLP) category. Companies that are inactive for a year or more have applied for shutting down their companies — and they are in a variety of businesses.
Some of the firms that have applied for closure are Acute Innovations, Algebra Advisors, Apollo Alloy Cast, Farm Rambaug, Hot Plate Ventures, Jay Realty Consultancy, Patel Commodities, Roy Infracon, Zuki Productions, Yogiraj Textile and Venus Infra Equipment, among others.
What is a Limited Liability Partnership?
According to the Companies Act, an LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. Here, partners are liable to the full extent of their assets but their liability is limited to their agreed contribution to the LLP.
On February 11, 2022, RoC finally issued a circular to go ahead with striking off the companies if no stakeholders oppose it. The circular read: “Notice is hereby given that the Registrar of Companies has received an application in Form 24 from the LLPs under section 75 of the LLP Act, 2008 and Rules 37 (1)(b) of the LLP Rules, 2009 for removal of its/ their name(s) from the register of LLPs either because they were not carrying out any business or operation for a year or more and has made an application with the consent of all partners of the LLP to strike off its name from the register.”
An official at the RoC, Gujarat, explained that “LLPs shutting down is a common phenomenon in Gujarat. The pool of aspirational or would-be entrepreneurs is high in Gujarat and therefore the number of people who fail is equally high in comparison to other Indian states. Companies shutting down is a part of the process, but companies, especially LLPs, shutting down shows how partnership at an initial stage may not be working out as expected.”
The circular was issued by the Indian Corporate Law Service officer (ICLS) MK Sahu, who heads Gujarat’s Registrar of Companies.
Possible reasons for the closure of LLPs as explained by Ahmedabad-based Company Secretary Manasvi Shah:
Cash Crunch In Business
LLPs are considered better options when the size of the business is small due to certain benefits like lesser compliances. But they either incur losses or are unable to commence business operations within the stipulated time due to various reasons such as the economic impact of the Covid-19 pandemic, fall in demand or disruption in the supply chain.
As a result, they face a cash crunch. As such small businesses are financially fragile and they are unable to pay ongoing operational expenses and overheads, forcing them to opt for voluntary shutdown.
Business Fails In Early Stage
Limited liability partnerships must have at least two members, so even if one member is willing to leave the business the LLP may have to be dissolved. Then, there may be certain LLPs that were in the ideation and formation stage — a very nascent stage of the business cycle — and failed right then. The rate of business failure is also high in Gujarat.
LLP loses its purpose
Most LLPs have to rely on funding from partners (promoters) and debt funding, as there is no concept of equity investment, so it’s not possible to raise funds from investors or venture capitalists (VCs). Also, funds raised in the form of borrowing creates an additional burden on the LLPs as it increases finance cost. The purpose for which the LLP was floated often never fructifies and so they close down.
Also Read: RoC Warns 1,552 Gujarat Firms For Noncompliance Of Law. Here’s why?