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Month: June 2022

Differences between Partnership & Hindu Undivided Family(HUF) Business

A partnership comes into existence, by means of a contract between partners, whereas, a joint Hindu family (hereinafter referred to as HUF) arises as a result of status, i.e., by birth in the family. Accordingly, if two or more members of an HUF carry on an inherited business, it is not a partnership because it has been created by status or obtained by birth and not by an agreement.

HUF is a unique form of business existing only in India and is governed by the provisions of the Hindu Law. It comes into existence by operation of Hindu Law and not out of contract. The firm is owned by the members of undivided Hindu family, called co-parceners. The business of an HUF is managed by the senior-most male member, also known as Karta or Manager.

There are two schools of Hindu Law, namely,

  • Dayabhaga, and;
  • Mitakshara.

Dayabhaga It is applicable only to the states of West Bengal and Assam. According to this school, only the male members become heirs on the death of the father. Technically, HUF business is not possible under this system.

Mitakshara It is applicable to the rest of India. According to this school, a joint Hindu family consists of all persons including the wives and unmarried daughters lineally descended from a common ancestor. But only those persons constitute the firm who acquire by birth a coparcenary interest in the joint ancestral property, such interest belongs to three successive generations in the male line (son, grandson, and great grandson) who inherit the ancestral property immediately on their birth in the family. Thus, the property inherited by a Hindu from his father, grandfather and great grandfather is regarded as his ancestral property. The Hindu Law Succession Act, 1956 has extended the line of coparcenary interest to female relatives of the deceased coparceners and male relative claiming through such female relatives.

As the head of the joint family, the Karta has full control over business affairs of the family. He also acts as the custodian of the firm’s assets. His liability is unlimited, whereas, the liability of coparceners is limited to the value of their individual interests in the joint ancestral property. The death or insolvency of a coparcener or even that of the Karta does not affect the life of the business of the family. However, an HUF firm can be dissolved through mutual agreement among all the coparceners.

BASIS FOR COMPARISON PartnershipHindu undivided family
RelationshipRelation subsists between the partners. It is a single person and it cannot have a partnership by itself 
NUMBER OF PERSONSIn a partnership business, the number of members cannot exceed 20 in case of non-banking business and 10 in case of banking business.There is no such ceiling on the number of members (coparceners) in HUF.
Admission of new membersNo new partner can be admitted to the existing partnership without the consent of all the other partners.HUF firm, a person becomes a member (coparcener) merely by his birth.
Minor memberA minor cannot become a full-fledged partner in a firm; he can be admitted only to the benefits of partnership.HUF, a male child becomes a full-fledged member by birth.
Rights of femalesIn a partnership, women can become partners and they enjoy the same rights and privileges, as do male partnersHUF business, on the other hand, the membership is restricted to male members only. However, as per Hindu Law Succession Act,1956, a female relative of a deceased male member gets a coparcenery interest in the event of his death.
Management Management All of the partners may involve in the management Karta of HUF is managing the business 
Implied agencyIn a partnership, every partner has implied authority to represent the firm and bind the other partners by his actsHUF this right rests with the Karta only, other members may be allowed by Karta expressly or impliedly to contract debts on behalf of the firm
Liability of membersIn a partnership, the liability of all the partners is unlimited. Every partner is jointly and severally liable to third parties for the full debts of the firm.HUF, liability of each member, except the Karta, is limited to the extent of his share in the property of the family.
Share of profit Partners can share profit as per the agreement No such sharing of profits in HUF Property 
Property The properties even though in the name of partnership firm belongs to all partners This business is a species of ancestral joint property in which every member of a family acquires 
AuthorityEach partner is the agent of others It has implied authority to contract debts and pledge the properties and credit of the family for the ordinary purposes of the family business 
Dissolution Firm can be dissolved on the eve of death of partner, retirement of partner etc., unless otherwise than agreed to in the agreement The death of Karta will not lead to the dissolution of the HUF business

Indian Partnership Act, 1932

Partnerships are a form of business association between two or more persons who join to carry on a trade or business. Each person contributes money, property, labour or skill and expects to share in the profits and losses of the business.

Partnership is a form of business organization, where two or more persons join together for jointly carrying on some business. It is an improvement over the ‘Sole-trade business’, where one single individual with his own resources, skill and effort carries on his own business. Due to the limitation of resources of only a single person being involved in the sole-trade business, a larger business requiring more investments and resources than available to a sole-trader, cannot be thought of in such a form of business organization. In partnership, on the other hand, a number of persons could pool their resources and efforts and could start a much larger business, than could be afforded by any of these partners individually. In case of loss the burden gets divided among various partners in a Partnership

As per Section 4 of The Indian Partnership Act, 1932 “Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all Persons who have entered into partnership with one another are called individually, “partners” and collectively “a firm” and the name under which their business is carried on is called the “firm-name”.

ESSENTIAL ELEMENTS TO CONSTITUTE PARTNERSHIP FIRM 

  1. Atleast 2 parties. Persons must be competent to enter into a contract. 
  2. Parties may be natural or Artificial. 
  3.  Agreement between the parties.
  4.  Agreement may be oral or in writing.
  5.  It may be express or implied.  
  6. Agreement must be to share the profits of the business;
  7.   Business must be carried on by all or any of them acting for all

Important Points

1. Members of HUF carrying on family business together are not partners. Burmese Buddhist Husband and wife doing business together are not partners. 

2. Sharing of Profits is not the only evidence for partnership – This means that of two person are only sharing profit then it does not means that they both are partners.

Example – A joint owner of a property sharing its return with the other owner does not make joint owners partner

 Salient features of partnership:

  • For partnership there must be two or more people who are eligible to contract, partners may be natural person or artificial person.
  • In a partnership, the partners are agents for the partnership. As such, one partner may legally bind the partnership to a contract or agreement that appears to be in line with the partnership’s operations. As most partnerships create unlimited liability for its partners, it is important to know something about potential partners before beginning a partnership.
  • In a partnership the liability of partners is unlimited. Partners may be called on to use their personal assets to satisfy partnership debts when the partnership cannot meet its obligations. If one partner does not have sufficient assets to meet his/her share of the partnership’s debt, the other partners can be held individually liable by the creditor requiring payment.
  • The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such are not partners in such business.
  • As general rule, a person who receives a share of the profits is prima facie deemed to be a partner of the firm but the receipt of such share, or of a payment contingent on or varying in the profit of a business, does not of itself make him a partner in the business. Thus if a person is being repaid the money that it has advanced to the partnership firm from the profits of the firm then it does not become a partner.
  • Sharing of profit means sharing of losses too.
  • Pa-basis Partnership Company Legal Status A firm is not a legal entity. Therefore, it has no legal identity distinct from the personalities of its constituent members A company is considered a separate legal entity distinct from its members. Agency In a firm All the partners are an agent for each other, as well as of the firm In a company, a member is not an agent of any other member nor the company. A member’s actions do not bind either Distribution of Profits The profits of a firm must be distributed among the partners according to the terms stated in the partnership deed There are no compulsions to distribute its profits among its members. A portion of the profits becomes distributed among the shareholders when dividends are declared partnership should be there to carry on some business.