Indian legislation is not mandatory for a sole proprietor to initiate business only after obtaining a separate 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 only to obtain a few licenses and undergo registration approvals under specific 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, a proprietor needs to understand all obligations and liabilities of his entity and himself as the sole proprietor to fulfil before the final closure of the business.

If you are a sole proprietor and have decided to close down your proprietorship business permanently, 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 essential to avoid future complications and legal arbitrations, which otherwise be faced if the company 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: Businesses shall have to be closed on receiving legal orders from legal authorities if they view trade as illegal or unethical.

Failures or limited resources: There is always a qualified source for investment and finance for a sole proprietor. Holding business single-handedly, a proprietor has to manage his business with only a few heads he holds. Failure in business due to limited resources can also lead to the closure of sole proprietorship.

Voluntary dissolution: With challenges a sole proprietor faces, he may opt to close down his business permanently or on the advisory of a legal expert stating for no prospects the company to grow.

• Steps for Legal Closure of Sole Proprietorship business.

1. Delicensing of business :

The foremost thing for the closure of a sole proprietorship business is to apply for cancellation of all registrations that the firm holds and the formation of a business closure agreement 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 concerned state 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.

2. Sale of Assets :

Preparation of sale agreements and declarations from the parties buying assets must be obtained to keep a legal record of all asset transactions. Then all assets are to be sold with clearing all payments from the buyers.

3. 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 to be used in case of any future obligation from any party arise.

4. 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 businesses or proprietors.
• Easy Final Settlement: Going for dissolution of sole proprietorship through legal agreements with all creditors, employees and parties associated with a business will help better settle 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.