The compilation of these Forms of Business Organisations Notes makes students exam preparation simpler and organised.
Joint Hindu Family Business
The Joint Hindu Family Business or the Hindu Undivided Family (HUF) is a unique form of business organisation found only in India. Nowhere else in the world is this a legal form of business entity. Let us learn about this form of organisation and its unique features.
Hindu Undivided Family (HUF)
The Joint Hindu Family Business or the Hindu Undivided Family (HUF) is a unique type of business entity. It is governed and dictated by the Hindu Law, which is one of the several religious laws prevalent in India.
So who all are members of such an organization? Well, any person born into the family (boy or girl) up to the next coming three generations is a part of the HUF. These members are the co-parceners. The head of such a Joint Family Business is the eldest member of the family, the “Karta”. He is the main person responsible for the business and the finances.
Features of a HUF
Formation: To begin a Hindu Undivided Family there must be a minimum of two related family members. There must be some assets, business, or ancestral property that they have inherited or will eventually inherit. The formation of a HUF does not require any documentation and admission of new members is by birth.
Liability: The liability of all the various co-parceners is only up to their share of the property or business. So they have limited liability. But the Karta being the head of the HUF has unlimited liability.
Control: The entire control of the entity lies with the Karta. He may choose to confer with the co-parceners about various decisions, but his decision can be independent. is actions will be final and also legally binding.
Continuity: The HUF can be continued perpetually. At the death of the Karta, the next eldest member will become the Karta. However, keep in mind a Hindu Undivided Family can be dissolved if all members mutually agree.
Minority: As we saw earlier the members are eligible to be co-parceners by the virtue of their birth into the family. So in this case, even minor members will be a part of the HUF. But they will enjoy only the benefits of the organisation.
Advantages of the HUF
A Hindu Undivided family is comprised of family members running a business. Like any other organisation, there is scope for disagreements and conflicts. But since Karta has absolute power and takes all decisions by himself, it will lead to effective management.
Just like a company, the existence of a HUF is perpetual. The death or retirement of one member of even the Karta will not affect it, and it will continue on.
Since the co-parceners do not have any effective control over the management of the HUF, and all power lies with the Karta, the liability of the members has also been limited to only their share of the property. This keeps the balance between power and responsibility.
Also since all members of the HUF are relatives and members of the same family, there is a sense of loyalty and cooperation. The trust among members is also there and leads to overall cooperation.
Disadvantages of the HUF
No outside members other than family members can be introduced to the HUF. This makes it very difficult to get additional capital from the market. With limited capital, the chances of expansion are very low. It limits the scope of the business.
While Karta has all the power he also has the burden of unlimited liability. This may make him overly cautious and timid in his business dealings. In turn, the business could suffer. Another factor is that he may even be held responsible for the actions of other members.
Also, the absolute dominance of Karta’s overall business and financial decisions make cause conflict among the HUF. His decisions and business acumen may be questioned by other members, and cause issues within the HUF.
Another issue may be that Karta may not be the most qualified person to lead the business. The position is given to the senior-most family member, whether he is the most qualified or not is not taken into consideration.
What are the two systems of the Joint Hindu Family?
There are two systems of the HUF, namely
- Dayabhaga System: Here both male and female members will be co-parceners in the Hindu Undivided Family
- Mitakashara System: Here only the male family members are admitted into the HUF, the female members have no share.
But the government of India has amended the Hindu Succession Act to make sure both male and female members have equal rights on ancestral properties.