How to close a sole proprietorship, a partnership and an LLP — and retiring while the business carries on

Hook

A boss said to me: "That stall of mine stopped two years ago." I asked him: "Did you terminate the registration?" He said: "No need, surely? Stopped is stopped." You do need to. And not terminating it is an offence. A fine not exceeding RM10,000, or imprisonment not exceeding one year, or both. With a Sdn. Bhd. it is "leave it alone and it keeps generating costs". Sole proprietorships and partnerships work the other way round — leave it alone and the government takes you to be still trading.

Sole proprietorships and partnerships: how to close them

Terminating a business registration has four grounds: the business has ceased, the partnership has been dissolved, the owner has died, or a court order. The procedure is not complicated: fill in a notice of termination form, have the owner and every partner sign it, and lodge it. There is no fee for this application. The document to attach is the business registration certificate; in the case of a death or a court order, attach the death certificate or the court order as well. The deadline is thirty days — counted from the day the business terminated. And two points a lot of people do not know. First, if your registration had already expired, there is nothing more to file for termination. Expired is expired. If you need proof, you can separately buy a confirmation of expiry. Second, if the owner dies, the registration is terminated automatically. But — the personal representative or the next of kin has to notify the Registry within four months after the death.

Three things to clear before you close

Before you press terminate, there are three things that must be dealt with first: tax, EPF and SOCSO. Because when the registration is cancelled, responsibility for those three does not get cancelled with it. Get the order wrong and it becomes very awkward: you terminate first, and only afterwards discover there is a tax bill unsettled and staff EPF not paid up — and by then, to deal with it, you no longer have that "currently trading" status. So: clear the three first, then terminate.

How to close an LLP

A limited liability partnership — an LLP — has two roads. The first: striking off by the Registrar. If the Registrar has reasonable cause to believe the LLP is not carrying on business, or has contravened the law, he may strike it off. As with companies, the partners have thirty days to show cause why it should not be struck off. But note this: that road is the Registrar's power. At present it is not open for you to "apply" for a striking off yourself. So in practice the one you can start yourself is the second: voluntary dissolution. The provision is written plainly, and there are two conditions, both needed: first, the LLP has ceased to carry on business; second, its debts and liabilities have been fully settled. Only when both are met can the partners apply to the Registrar in writing and ask him to issue a declaration of dissolution.

Leaving the partnership while the business carries on (the heart of this episode)

Now the more common one: the business carries on, but you want out. First, something a lot of partners only learn after a quarrel. The default rule in partnership law is that all partners share the profits equally and bear the losses equally — regardless of who put in more capital. Equally. You put in eighty per cent of the money and he put in twenty, but unless it is written down in black and white, the law's starting point is half each. In the same provision there is another line that accounting firms and law firms use particularly often: no new partner may be brought in without the consent of all the existing partners. So "the boss promised to make me a partner" — if the other partners do not agree, that sentence cannot be delivered.

Retiring does not shake off the old debts

The second thing, and the more important one. The provision is written very bluntly: a partner who retires from a firm does not thereby cease to be liable for partnership debts and obligations incurred before his retirement. You are out, and the old debts are still yours. Is there a way out of them? Yes, but the condition is hard — it takes an agreement between the retiring partner, the newly constituted firm, and the creditor, before there is a release. Note that last word: the creditor. You and your partner agreeing that "the future debts are all yours" is a matter between the two of you; the creditor is not bound by it. Who he goes after is still his decision.

You have to let the outside world know you have left

The third thing is the easiest to miss, and the most expensive when missed. The provision says: a person dealing with a firm after a change in it is entitled to treat all the apparent members of the old firm as still being members of the firm until he has notice of the change. In plain language: if your long-standing customer does not know you have retired, then in his mind you are still a partner — and for business he does with that firm after your retirement, you may still be liable. So how do you give notice? The provision splits it into two kinds of people. Long-standing customers and suppliers you have dealt with — they have to have actual notice. Send letters, send notices, and keep the evidence. Strangers who have never dealt with you — the provision says a notice published in the Gazette is deemed to be notice to them. Two kinds of people, two ways of doing it. Miss one and you have left a hole. And finally, do not forget that three places have to change together: the partners on the business registration, the bank's authorised signatories, and the contact person on the customer and supplier side. Change one and miss two — and those two are the road back to you later.

To close

Three kinds of status, three ways of closing. Sole proprietorships and partnerships — file within thirty days, and clear tax, EPF and SOCSO first. A limited liability partnership — you have to apply for it yourself, and the debts have to be settled first. A Sdn. Bhd. — that is a whole separate procedure. And if you only want out, not to close it — remember those three things: the old debts are still there, the outside world has to be told, and three sets of signing authority have to change. Want to work out how your particular status should be handled? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.