Joint Hindu Family Business: Features, Merits and Demerits
Joint Hindu Family Business is a form of business, which is found only in India, and wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF). It is governed by the Hindu Law (The Hindu Succession Act, 1956). It is stated that the law of inheritance creates the Joint Hindu Family Business. The basis of membership in the business is birth and three successive generations can be members of the business.
‘Karta‘ is the eldest member of the family, who is also the head of the business. The entire business is controlled by the Karta, and his decisions are binding on all the members. All members have equal ownership right over the property of the ancestors, and they are known as ‘co-parceners‘.
The Hindu Undivided Family Business consists of two systems under the Hindu Law: Dayabhaga System and the Mitakshara System.
- Dayabhaga System: This system is common in West Bengal and Assam, and it allows both male and female members of the family to be co-parceners. A member cannot make a claim to inherited property until his/her father has passed away.
- Mitakshara System: This system prevails all over India except in West Bengal and Assam. Only male family members are allowed to be co-parceners in the business.
Features of Joint Hindu Family Business
The features of a Hindu Undivided Family are as follows:
- Formation: There should be at least two members and ancestral property must be inherited by the members for the formation of the Hindu Undivided Family Business. Each member of the family becomes a member of the business by virtue of birth, and there is no need for any agreement between the family members.
- Liability: The liability of all the members except the Karta is limited to the extent of shares in the co-coparcenary property of the business. However, the Karta has unlimited liability and his personal properties can be used for paying the debts of the business.
- Control: Karta controls the entire family business. He has the authority to manage the business. He takes all the decisions and his decisions are binding on all the co-parceners.
- Continuity: HUF is not affected by the death of the members. In the case of the death of the Karta, the next eldest male member in the family becomes the Karta. However, the business can be terminated with the mutual consent of the members.
- Minor Member: Minors can also be members of the business as membership in the business arises by the virtue of birth.
Merits of Joint Hindu Family Business
The merits of a Hindu Undivided Family Business are as follows:
- Ease in formation: It is fairly simple to establish a Joint Hindu Family Business. No legal requirements, such as registration, are necessary. It does not demand agreement.
- Effective Control: The Karta has complete authority over all decisions, which avoids conflicts among the members as there is no interference from anybody. It also leads to quick decision making.
- Limited Liability of Members: The liability of all the co-parceners is limited except that of Karta. The liability of the members is limited to the extent of share in the family property. Therefore, the interests of all the members are protected and their risks are well-defined and precise.
- Continued business existence: The business will continue as usual after the death of the Karta, since the next eldest member will enter into the role of Karta. Hence operations are not terminated and continuity of business is maintained.
- More commitment: Since the business is controlled by family members, there is a strong loyalty amongst them. Quality in business growth is connected to family achievements, which helps in obtaining improved collaboration from all members.
Demerits of Joint Hindu Family Business
The demerits of a Hindu Undivided Family Business are as follows:
- Limited Resources: The Joint Hindu Family Business experiences a financial shortage, since it is mostly dependent on ancestral property. This limits the possibility of business expansion. As a result, the size of the business remains small, and the Karta cannot benefits from large-scale economies.
- Unlimited Liability of Karta: The Karta carries not just the burden of decision-making and management, but also unlimited liability. His personal belongings might be utilized to pay off business debts.
- Dominance of Karta: The control and management of the business are vested solely in the hands of the Karta, which may not always be acceptable to the other members, and it may lead to conflicts and breakdown of the family unit.
- Limited Managerial Skills: Karta cannot be an expert in all areas of management, his poor judgments may affect the business. His failure to make good decisions may even lead to financial difficulties and losses. Also, Hindu Undivided Family do not have adequate funds to hire experts or professionals in several domains such as purchasing, manufacturing, marketing, etc.
- Misuse of Power: Management of a Joint Hindu Family Business is centered in the hands of the family’s Karta. No other member is allowed to interfere with his management. This may lead to power misuse, with Karta misusing his position for personal benefits.
- Limited Membership: The membership of the business is restricted to family members exclusively. No one from outside the Joint Hindu Family Business can join the business. Therefore, they face the demerit of limited membership.
Please Login to comment...