Ever wondered what kind of business does Mukesh Ambani runs under the name Reliance Industries Limited? It is a Joint Hindu Family Business.
A Joint Hindu Family Business is a business type found solely in India. Also known as Hindu Undivided Family or HUF, this business follows a strict conduct code. And in doing so, it assures the entire family’s prosperity.
The members of HUF don’t hold individual identities or liabilities over things like profits and taxes. A whole family that may extend to generations is bound to one business.
A unique aspect of HUF is that it follows the Hindu Laws and not the partnership act. So while the entire family contributes to the business’ operations, they aren’t considered partners.
HUFs are run by the eldest family member, known as “Karta.” And while all the members assist them, the final decisions are in Karta’s hand. All the other members are known as coparceners. All family members for up to three generations are a coparcener in the business.
HUFs are of different types. Let’s explore them in detail.
Types of Joint Hindu Family Business
There are two primary types of Joint Hindu Family Businesses – Dayabhaga and Mitakshara. But what does each mean? Keep reading to find out.
Dayabhaga is an inclusive and reformed Hindu business law. It exists in states like Assam and West Bengal. The Dayabhaga system considers Stridhan a fundamental right. Stridhan gives the woman the right to sell, purchase, and mortgage her part of the business without her husband’s consent.
Moreover, Dayabhaga allows the transfer of ownership only after the father’s death. This point of inheritance is what primarily separates it from Mitakshara.
Dayabhaga also gives the widow a share in the business and the right to enforce partition among other family members.
Except for West Bengal and Assam, all Indian states accept the Mitakshara doctrines. Mitakshara gives all the male members of the family a share in the business. Since members acquire property rights at birth, the father’s death plays no role in inheritance.
Since the Mitakshara system depends on birth, the share of coparceners changes with each new addition to the family. That is why their share isn’t defined in absolute terms.
Features of HUF
Joint Hindu Family Businesses have certain features when it comes to their everyday operations. They are as follows:
The eldest person in the family, known as “Karta,” manages a HUF. Karta holds the power to make every business-related financial and strategic decision.
While all the family members act as supervisors and can give their inputs, the decision-making rights rest with the Karta. All family members place their absolute trust in the Karta. In fact, the system of HUF runs on the trust between family members and Karta.
Minors Are Partners
Conventional business laws don’t allow minors control over the business. But this isn’t true in a Joint Hindu Family Business. The partnership of HUF is based on birth only. Hence, any minor can be a part of the HUF.
The business share is equally divided into minors as well as adults on a partition. However, minors may not suggest anything for the business.
Formation And Membership
To form a HUF, your family must have at least two members. Also, you must have some land/property/business that is inherited or can be potentially inherited. But that’s basically it! No extra legal paperwork is required to mark your family as HUF.
If you are born in a HUF, you automatically get the joint Hindu family business membership. So even the membership isn’t complex.
As all the coparceners have a limited share in the property and business, they have limited liability. Karta, on the other hand, has infinite liability. So for Karta, great power does come with greater responsibility.
A HUF is basically permanent. The death of any family members or even the Karta doesn’t signal the end of the business. The eldest of the remaining members is allowed to take over as the new Karta. Such seamless inheritance keeps the business’s success consistent too.
In other businesses, conflicts between owners may lead to the downfall of the company. But this decline is prevented through the clear transfer of power in the HUF businesses.
A Joint Hindu Family Business can be dissolved only when all the family members agree. Not even Karta has the authority to dissolve the business without proper support.
This is due to the equal share rights of the people in the HUF system. So dissolving a joint Hindu family business is not an easy task.
Advantages of Joint Hindu Family Business
In Joint Hindu Family Business, Karta is the supreme owner. He can keep all the secrets with himself. Due to this, the chances of crucial business info leaks reduce.
Some secrets might transfer from one Karta to the other for the smooth functioning of the business. But that doesn’t mean they’ll be disclosed to others outside the company.
As all the decisions are taken by Karta and Karta is trusted by the family members, the business runs smoothly.
Karta can appoint as many people as he wants for the business’s smooth management, and it will not require any extra effort.
The simple transfer of power helps the Joint Hindu Family Businesses be continuous in their approach. The stepping down of Karta would mean a potential loss if it wasn’t for this system where the next eldest person becomes the Karta. But with this process, there is no chance of a hassling change of ownership.
Disadvantages of a Joint Hindu Family Business
Over-Dependence On Karta
The Karta holds immense power in a HUF. This is why the entire family is dependent on him. It is difficult for the family members to track even the things that might be crucial to run the business if Karta keeps secrets.
If the Karta dies suddenly, they might take away with them a crucial secret or two. So while the transfer of power may be seamless, there’s little transparency.
Sometimes, it might be tricky for HUFs to expand. This is because they can’t access capital from sources outside the family. All the capital comes from either ancestral property or through each member’s resources.
This can be significantly limiting if the business is suffering losses. Moreover, it can hurt the growth prospects of the company immensely.
Lack of Diverse Managerial Skills
In a HUF, only the family members can attain managerial positions. While this does prevent negative outside influence, it also hampers the prospects of the business. How so? Because when a diverse group of people manages a business, new ideas and innovation flourish.
Since only family members govern principal decisions and hold critical positions, a HUF can often suffer from short-sightedness.
Despite these disadvantages, HUF’s are excellent ways for middle and upper-middle-class Indian families to gain financial strength. There’s little that can’t be navigated if your entire family has your back.
Joint Hindu Family Business is an excellent direction to take your family to. It allows you to pool resources and create an enormous business empire of your own. So if your family is tight-knit, start a HUF today!