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;
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.
Differences between Partnership and HUF Business
The main points of differences between a partnership and HUF business are as follows.
1. Basis of formation
A partnership arises out of a contract between partners. Whereas an HUF arises by the operation of Hindu Law. It is created by status or birth in the family, no agreement is needed for it.
2. Regulating law
A partnership is governed by the provisions of the Indian Partnership Act, 1932. An HUF business is governed by Hindu Law Succession Act.
3. Number of members
In a partnership business, the number of members cannot exceed 20 in case of non-banking business and 10 in case of banking business. But there is no such ceiling on the number of members (coparceners) in HUF.
4. Admission of new members
No new partner can be admitted to the existing partnership without the consent of all the other partners. In case of HUF firm, a person becomes a member (coparcener) merely by his birth.
5. Minor member
A minor cannot become a full-fledged partner in a firm; he can be admitted only to the benefits of partnership. In an HUF, a male child becomes a full-fledged member by birth.
6. Rights of females
In a partnership, women can become partners and they enjoy the same rights and privileges, as do male partners. In case of an HUF 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.
7. Implied agency
In a partnership, every partner has implied authority to represent the firm and bind the other partners by his acts. In HUF 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.
8. Liability of members
In 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. Whereas in case of HUF, liability of each member, except the Karta, is limited to the extent of his share in the property of the family.
9. Right to accounts
Each partner not only enjoys a right to inspect the books of account of the firm and demand a copy thereof, he can even demand the accounts of the past dealings. But a coparcener has no right to ask for the accounts of past dealings. He can ask for the position of the existing assets only.
10. Mode of dissolution
A partnership firm is dissolved on the insolvency or death of a partner. But the death, lunacy or insolvency of a coparcener does not affect an HUF. It continues to operate even after the death of a coparcener.