HUF and Co-operative Society
Class 12 CBSE Entrepreneurship — Unit 2: Entrepreneurial Planning
Joint Hindu Family — Meaning
Under Hindu law, HUFs are defined ‘as a family, which consists of male lineally descended from a common ancestor and included their wives and unmarried daughters.’ The relation arises from status, not legal contracts. Creating HUFs can be a way to save taxes. ⭐ Two conditions for existence: (1) Minimum two members in the family, (2) Existence of some ancestral property.
Two Schools of Law
| Aspect | Dayabhaga | Mitakshara |
|---|---|---|
| Prevalence | West Bengal and Assam | Rest of India |
| Son's Right in Property ⭐ | After father's death (no right by birth — the son gets the property only after the father dies) | From birth (the son acquires an interest in the joint family property by birth itself) |
Characteristics of HUF
The essential features of a Joint Hindu Family business. Items marked with a star are exam-critical.
HUF — Legal Formalities
Capital and Members
Step 1: Arrange Capital and Ensure Members
The two major requirements are: Capital — which can come from ancestral property, gifts received by the HUF, or property transferred through a will — and Persons — a minimum of two members should exist in the family. Without both these elements, an HUF cannot be formed.
Note: The property must be ancestral or received in the name of the HUF. Personal property of an individual member is not HUF property unless explicitly transferred.
- •A daughter ceases to be a member of her father's HUF after marriage, becoming a member of her husband's HUF.
- •Adopted child can become a member but not a coparcener.
- •HUF continues to exist in the hands of female members after the death of the male member.
- •A widow cannot be the Karta as she is not a coparcener.
- •⭐ HUF is a separate entity for income tax purposes under Section 2(31) of the Income Tax Act.
Co-operative Organisations
“Co-operation is a form of organisation wherein persons voluntarily associate together as human beings on the basis of equality for the promotion of the economic interest of themselves.”
“Society which has its objectives as the promotion of economic interests of its members in accordance with co-operative principle.”
Voluntary Organisation
Join and leave freely
A co-operative society is a voluntary association of individuals. Any person can become a member irrespective of caste, creed, religion, or gender. Members can leave the society at any time by giving proper notice and withdrawing their share capital. No one is forced to join or stay against their will.
Democratic Management
One member, one vote
Co-operatives are managed on democratic principles. Each member has one vote regardless of the number of shares held — unlike companies where voting rights depend on shareholding. The managing committee is elected by members on the principle of one member-one vote. This ensures equality among all members.
Service Motive
Service, not profit
The primary objective of a co-operative society is to render service to its members, not to earn profit. While co-operatives may earn surplus, profit-making is not the main motive. The focus is on providing goods and services at reasonable prices and promoting the economic well-being of members.
Capital and Return
Limited dividend
Capital is raised from members through share capital. The maximum shareholding by any member is restricted to 10% of the total share capital or ₹1,000 (as per the Co-operative Societies Act). The dividend on shares is also restricted to a maximum of 9% per annum — this ensures the capital-raising objective does not override the service motive.
Government Control
Regulated by law
Co-operative societies are regulated by the Co-operative Societies Act of the respective state or the Multi-State Co-operative Societies Act. They must submit annual reports, get accounts audited, and follow rules prescribed by the Registrar of Co-operative Societies. Government exercises strict supervision.
Distribution of Surplus
Based on purchases
After paying the limited dividend (maximum 9%), the remaining surplus or profit is distributed among members based on the purchases made by them from the society — not based on their shareholding. This encourages members to transact more with the co-operative and rewards loyalty.
An entrepreneur does not find this form very desirable for a new venture due to their quest for excellence, drive for independence, project champion tendency, and strong desire to earn profit — which align less with the mutual help motive.
Choosing the Right Form
No form is without merits and limitations. No form is the best form. Selection is difficult and affected by multiple factors. No single factor decides the form; it's a summative effect of factors.
| Factor | Sole Prop. | Partnership | Company | HUF | Co-operative |
|---|---|---|---|---|---|
| Capital Requirement | Limited | Moderate | Large | Ancestral property | Shared capital |
| Risk & Liability | Unlimited | Unlimited (joint/several) | Limited | Karta unlimited; coparceners limited | Limited |
| Managerial Control | Complete control | Shared among partners | Board of Directors | Karta (senior most male) | Elected committee |
| Scale of Operations | Small scale | Medium scale | Large scale | Small to medium scale | Small to medium scale |
| Continuity | Unstable (death/insolvency ends) | Unstable (death/retirement of partner) | Stable (perpetual succession) | Perpetual (birth/death doesn't dissolve) | Stable (separate legal entity) |
| Government Regulation | Minimal | Minimal to moderate | High (Companies Act) | Minimal (Hindu law) | Moderate (Co-op Societies Act) |
| Tax Burden | Low | Moderate | Higher | Separate PAN; lower tax slab | Low (co-operatives enjoy exemptions) |
| Formation Ease | Easiest | Easy (partnership deed) | Complex (registration, compliance) | Automatic (by status under Hindu law) | Moderate (10+ members, registration) |
| Confidentiality | Complete | Limited to partners | Low (public disclosures) | Limited to Karta | Low (government scrutiny) |
| Flexibility | Maximum | Moderate | Low | Moderate (Karta decides) | Low (rules and regulations) |
Key Takeaways
Key Takeaways
- Joint Hindu Family (HUF) is a unique form of business organisation prevailing only in India, governed by Hindu law — ownership, management, and control rest with male members of a joint Hindu family.
- There are two schools of law governing HUF: Dayabhaga (West Bengal & Assam — son gets right after father's death) and Mitakshara (Rest of India — son gets right from birth).
- The Karta (senior most male member) has unlimited powers and unlimited liability, while coparceners have limited liability restricted to their share in joint family property.
- HUF is a separate entity for income tax purposes under Section 2(31) — it requires its own PAN, deed, and bank account. Formation is by status under Hindu law, not by contract.
- A co-operative society is a voluntary association based on mutual help and service motive — managed democratically on the principle of one member-one vote, with limited return on capital (max 9% dividend).
- The selection of business form depends on multiple factors — capital requirement, risk tolerance, managerial control, scale of operations, continuity, regulation, tax burden, formation ease, confidentiality, and flexibility.
- No single form is universally best — the choice involves weighing the summative effect of all factors against the entrepreneur's goals, resources, and constraints.