Hindu Undivided Family Business

Hindu Undivided Family business is a precise kind of business structure found only in India. This is one of the classical methods of business structure in the nation. It is administered by the Hindu Law. The source of membership in the company is birth in a family and 3 consecutive generations can be members of the company.

The business is managed by the head of the family (eldest member) and he is called Karta. However, all the members hold equal ownership over the property of an ancestor and they are called as co-parceners.

Meaning of Joint Hindu Family Business

• It refers to a form of business organization which is owned and carried on jointly by the members of the Hindu Undivided Family (HUF).
• It is also known as Hindu Undivided Family Business.

Characteristics of Joint Hindu Family Business:

Formation

• There should be at least two male members in the family to form a HUF.
• Ancestral property should have been inherited by members of HUF.
• All of the members enjoy this property and have an equal share in that property.
• Thus, any child taking birth in that family becomes a member of the HUF.
• There is no requirement for an agreement to become a member.

Liability

• There is limited liability of all the members or co-parceners in the Hindu Undivided Family business.
• All the co-parceners have equal rights and shares in the property of Hindu Undivided Family business
• The Karta has unlimited liability.

Control

• Karta is the person who has full control over the Hindu Undivided Family business.
• Karta can take advice from all the members but he is not bound to accept their decisions.

Continuity

• After the “Karta” is deceased, the very next eldest member takes up the position of Karta in Hindu Undivided Family business.
• The business can be divided and ended up by the mutual consent of the members.

Minor Members

• The person who has taken birth in Hindu Undivided Family can be a member of the family business.
• Therefore, a minor can also be a member of the family.

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Important terms which are used in a Joint Hindu Family Business:

(1) Hindu Undivided Family

• The family who runs or carry on the business organization.
• Hindu Undivided Family includes an eldest male member ‘Karta’ and the other male members called co-parceners.

(2) Karta

• He is the person who is the head and eldest member of the family.
• Karta is the person who has full control over business activities.

(3) Ancestral Property

• It is the property of forefather or an ancestor and over which the members have equal right.

(4) Co-parceners

• It consists of propositus and three lineal descendants.
• They have equal ownership rights over the property of an ancestor.

Systems which are used in a Joint Hindu Family Business

There are two systems which are used in joint Hindu family business :

(1) Dayabhaga System

• It prevails in West Bengal & Assam and allows both the male and female members of the family to be co-parceners.
• A son gets right in the ancestral property only after the death of his father.

(2) Mitakashara System

• There are four sub-schools – Benares, Mithila, Maharashtra or Bombay, and Dravida or Madras school.
• The application of schools of Mitakshara is region­wise.
• Mostly, it prevails in most parts of India, except West Bengal.
• It allows only the male members to be co-parceners in the business.

Note: The Hindu Succession (Amendment) Act, 2005 gave Hindu women the right to be coparceners or joint legal heirs in the same way a male heir does.

What are the merits of a Joint Hindu Family Business?

The merits of the joint Hindu family business are as follows:

(1) Effective Control

• The Karta has full control over the business activities and takes a decision quickly.
• No one can interfere in the decision of Karta as every member is bound to accept his decision.
• Hence, it avoids clashes among the members and results in very speedy decision making.

(2) Continued Business Existence

• After the death of Karta, the next eldest member takes up his position. So, it does not affect the activities of the business.
• Hence, all the business activities are done smoothly, continuously without any threat.

(3) Limited Liability of Members

• As all the liability of the members is restricted to the extent of their share in the business.
• But the Karta has unlimited liability due to his complete hold on the business.
• Hence, in case of dissolution of the business, Karta’s personal assets and his share will be liable.

(4) Expanded Loyalty and Cooperation

• All the business operations are carried on by the members of a family jointly.
• So, this increases loyalty and cooperation with each other without any hindrance.
• Therefore, all the targets of the business can be achieved by the cooperation among the members and the Karta.

Limitations of a Joint Hindu Family Business

Below-mentioned are the few demerits of a joint Hindu family business:

(1)Limited Resources

• All the members of Joint Hindu Family Business totally depend upon the ancestral property due to their limited liability.
• Many commercial banks resist extending the credit limit due to the weak financial position of the business.
• Hence, this will result in limited expansion and growth of the business.

(2)Unlimited Liability of Karta

• All the important decision regarding management of various business activities are taken by Karta.
• But there is a disadvantage with the Karta that he has unlimited liability.
• Hence, all the business debts are paid by using the personal assets of the Karta.

(3)Dominance of Karta

• The Karta takes all the decisions individually and manages the business
• He also involves other members in decision making.
• But Karta is not bound to accept the decisions of the members which may create conflicts between the Karta and the other members.
• Hence, due to clashes in decision making, lack of cooperation between Karta and other members occurs.

(4)Limited Managerial Skills

• Sometimes the members suffer due to unfair decisions taken by the Karta in respect of business operations.
• Unfair decisions are taken due to the lack of managerial skills.
• So, the Karta cannot be knowledgeable or proficient in all managerial functions.
• Nowadays, the joint Hindu family business is declining due to the decreasing number of joint Hindu families in the nation.

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