According to suitability, there are various ways of doing business in India, but the government has recognized that family businesses should also be regulated and incorporated. Hindu Undivided Family (HUF) is a way of doing family business in a very structured and legal manner, making it possible to reduce family disputes due to business in the long term. Let's understand in detail what HUF is and how it works.
What is a HUF?
A simple concept in business is that you should treat yourself as separate from your business. By continuing the thought, the Hindu Undivided Family is a joint family considered a separate entity from the individual family members. The family generally holds assets that have been passed on from their ancestors. Assets also include a gift or a property purchased from the sale of joint family property.
How does it work?
There is a head of the family called "Karta", who is the eldest member of the family and operates the business or whose consent is required to take material business-related decisions. All the members of the family are considered members of HUF. However, only male members of the HUF, called coparceners, can only demand the partition of the HUF. Female members of the HUF do not have such a right.
A primary reason for creating a HUF is to claim an additional tax deduction from income tax authorities. But, you need to satisfy the following conditions to create a HUF:
There are various advantages of forming a HUF over incorporating other forms of businesses like company, partnership firms, LLP, etc. These advantages are as follows:
When there is a positive side, there has to be a negative side as well. Here are a few disadvantages of forming HUF:
Keeping all the advantages and disadvantages of HUF in your mind, you can decide whether you want to create a separate entity to save tax or not. It all depends on the type of business, family corporations, and current financial situation. It would help if you kept in mind that the Karta of the family should be aware of the property and financial transactions done by coparceners.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.