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Question
Long answer type question.
Define a Joint Hindu family firm. Explain its merits and demerits.
Solution
A joint Hindu family firm is owned and managed by the members of a Hindu undivided family. Membership in this business is by birth; that is, as soon as a child is born in the family, he/she becomes the member of the family business. This type of organisation is governed by the Hindu Succession Act 1956.
Merits of a joint Hindu family business:
i. Easy formation: The formation of a joint Hindu family business requires the existence of ancestral property and at least two family members. It is governed by the Hindu Succession Act 1956 and does not require any agreement for its formation.
ii. Continuity: The continuity of a joint Hindu family business remains unaffected by the death of the Karta. This is because, in case of the death of the existing Karta, the next eldest member of the family takes over his responsibilities. Thus, the business continues to operate even after the death of the existing Karta.
iii. Limited liability: In a joint Hindu family business, the liability of all members is limited to the amount of capital invested by them in the business. In other words, the personal property of the members cannot be used to meet the liabilities of the business. However, the liability of the Karta is unlimited.
Demerits of a joint Hindu family business:
i. Limited capital: The amount of capital available with a joint Hindu family firm is limited to the amount of inherited wealth. The limited availability of funds, in turn, restricts the scope of expansion of the business.
ii. Limited managerial skills: The management of the family business lies in the hands of the Karta, who may not be professionally skilled to handle all the business operations. Thus, the efficiency in the management of the business solely
depends on the managerial skills of the Karta.
iii. Unlimited liability of Karta: The liability of the Karta is unlimited in a joint Hindu family firm. In other words, if the business assets are insufficient to meet the business debts, then the personal property of the Karta can be utilised for the purpose.
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