Joint Hindu Family Business (HUF)

Management > General Management > Forms of Business Organizations > Joint Hindu Family Business (HUF)

When starting a business or is interested in expanding an existing one, an important decision relates to the choice of the form of organization. By weighing the advantages and disadvantages of each form of organization, the most appropriate form is determined. The decision of selection also depends on the form which satisfies the need of the entrepreneur. Various forms of business organizations from which one can choose the right one include:

• Sole proprietorship,
• Joint Hindu family business,
• Partnership,
• Cooperative societies, and
• Joint-stock company.

Joint Hindu Family Business

Joint Hindu family business is the oldest and specific form of business organization found only in India. It refers to a form of organization wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF). It is governed by the Hindu Law, which is one of the several religious laws (personal laws) prevalent in India. The firm is created by the operation of law. It does not have any separate and distinct legal entity from that of its members. When two or more families agree to live and work together, throw their resources and labour with joint-stock and share profits and the losses together, then this family is known as composite family.

The basis of membership in the business is birth in a particular family. Any person born into the family (boy or girl) up to the next coming three successive generations can be members of the business. The business is controlled by the head of the family who is the eldest member and is called karta or ‘Manager’. Karta is the main person responsible for business and finances. All members have equal ownership right over the property of an ancestor and they are known as co-parceners.

There are two systems which govern membership in the family business, viz., Dayabhaga and Mitakashara systems. Dayabhaga system prevails in West Bengal and Assam and allows both the male and female members of the family to be co-parceners. Mitakashara system, on the other hand, prevails all over India except West Bengal and allows only the male members to be co-parceners in the business.

Features of Joint Hindu family business:

• Formation: For a joint Hindu family business, there should be at least two members in the family. There must be some assets, business or ancestral property that they have inherited or will eventually inherit. The HUF business does not require any agreement or documentation as membership is by birth. It is governed by the Hindu Succession Act, 1956.
• Liability: The liability of all members except the karta is limited to their share of the co-coparcenary property of the business. Thus their liability is limited. The karta, being the head of the family, however, has unlimited liability. Thus the Karta is not only liable to the extent of his share in the business but his separate property is equally attachable and amount of debt can be recovered from his separate property.
• Control: The control of the family business lies with the karta. He takes all the decisions and is authorized to manage the business. His decisions are binding on the other members. He may choose to confer with the co-parceners about various decisions, but his decision can be independent. His actions will be final and also legally binding. The members of the family have full faith and confidence in Karta. Only Karta is entitled to deal with outsiders. But other members can deal with outsiders only with the permission of Karta. Only Karta has the implied authority to contract debts and pledge the credit and property of the firm for the ordinary purpose of the businesses of the firm.
• Continuity: The HUF business can be continued perpetually.  The business continues even after the death, lunacy or insolvency of the karta or any other member, as the next eldest member takes up the position of karta, leaving the business stable. The business can, however, be terminated (dissolved) with the mutual consent of all the members.  Any single member has no right to get the business dissolved.
• Minor Members: The inclusion of an individual into the business occurs due to birth in a Hindu Undivided Family. Hence, minors can also be members of the business. But they will enjoy only the benefits of the organization.

Merits of Joint Hindu Family Business:

• Easy to Start: It is very easy to start the Joint Hindu Family Business. No legal formalities are required to be faced, such as registration. It requires no agreement.
• Effective control and Prompt Decision Making:
• Like any other organization, there is scope for disagreements and conflicts. But since the karta has absolute decision making power. it will lead to prompt, flexible and effective decision making. The. This avoids conflicts among members as no member can interfere with his right of karta to take a decision. The prompt decisions help the business to grab opportunities.
• Secrecy: In Joint Hindu Family Business, all the decisions are taken by the ‘Karta’ himself. He is in a position to keep all the affairs to himself and maintains perfect secrecy in all matters.
• Continuity: The HUF business can be continued perpetually.  The death, lunacy or insolvency of the karta or any member will not affect the business as the next eldest member will then take up the position. Hence, operations are not terminated and continuity of business is not threatened.
• Limited Liability of Members:
• The liability of all the co-parceners except the karta is limited to their share in the business, and consequently, their risk is well-defined and precise. This keeps the balance between power and responsibility.
• Freedom Regarding Selection of Business: The Karta is at freedom to select any business of his choice. He has not to depend on others.
• Increased Loyalty and Cooperation: Since the business is run by the members are relatives and members of the same family, there is a greater sense of loyalty and cooperation towards one other. Pride in the growth of the business is linked to the achievements of the family. The trust among members is also there and leads to overall cooperation.

Demerits of Joint Hindu Family Business:

• Limited Resources: The capital is limited only up to the resources of one family. No outside members other than family members can be introduced to the HUF.  Thus the joint Hindu family business faces the problem of limited capital as it depends mainly on ancestral property. This limits the scope for expansion of the business. The Karta cannot take advantage of economies of large size due to limited finance.
• Unlimited Liability of Karta: The karta has power but he is burdened not only with the responsibility of decision making and management of the business, but also suffers from the disadvantage of having unlimited liability. His personal property can be used to repay business debts. This may make him overly cautious and timid in his business dealings. Another factor is that he may even be held responsible for the actions of other members.
• Dominance of Karta: The karta individually manages the business and takes all the decisions which may at times not be acceptable to other members. This may cause conflict amongst them and may even lead to breaking down of the family unit.
• Limited Managerial Skills: The position of karta is given to the senior-most family member, whether he is the most qualified or not is not taken into consideration. Since the karta cannot be an expert in all areas of management and he may not be able to perform all managerial functions because of the limitation of time and energy. the business may suffer as a result of his unwise decisions. His inability to decide effectively may result in poor profits or even losses for the organization. Due to the limited scale of operations and financial resources, it may not be feasible for HUF to secure the services of experts in different fields like purchasing, production, and marketing.
• Misuse of Power: The karta is the only decision-maker of such organization. No other member can interfere in his management. This may lead to the misuse of power and the Karta may use the power for his personal interest.

The joint Hindu family business is on the decline because of the diminishing number of joint Hindu families in the country.

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Management > General Management > Forms of Business Organizations > Joint Hindu Family Business (HUF)