Difference Between Partnership and Hindu Undivided Family Business

A partnership and a Hindu Undivided Family business may both involve several persons carrying on a common business, but their legal nature is different. A partnership arises from an agreement between persons, while a Hindu Undivided Family business arises from family status. 

They also differ in membership, management, liability, agency, succession, dissolution and the position of minors.

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What Is a Partnership?

A partnership is a legal relationship created when two or more persons agree to carry on a business and share its profits. Section 4 of the Indian Partnership Act, 1932 defines partnership as the relationship between persons who have agreed to share the profits of a business carried on by all, or by any of them acting for all.

The persons who enter into this relationship are individually called partners. Collectively, they are known as a firm, and the name under which they conduct business is called the firm name.

A partnership has the following important features:

• It is created through an agreement between persons who are legally competent to contract.
• The partners agree to carry on a lawful business and share its profits.
• Every partner is an agent of the firm and can bind the other partners through acts done in the ordinary course of business.
• The rights and duties of partners are governed by the partnership deed and the Indian Partnership Act, 1932.

The existence of mutual agency is the most important test of partnership. Every partner acts both as a principal and as an agent. A partner is a principal when acting for personal interests in the firm and an agent when acting on behalf of the other partners.

What Is a Hindu Undivided Family Business?

A Hindu Undivided Family business is a business owned and carried on by members of a Hindu Undivided Family. It is generally managed by the Karta, who acts as the head and representative of the family.

Unlike a partnership, a Hindu Undivided Family business is not normally created by an agreement. It arises because of family status. Membership may arise by birth, marriage or adoption, subject to the principles of Hindu law.

Section 5 of the Indian Partnership Act, 1932 expressly states that partnership arises from contract and not from status. It further clarifies that members of a Hindu Undivided Family carrying on a family business are not partners merely because they are members of the family.

An HUF business has the following essential features:

• Membership arises from family relationship and not from a partnership agreement.
• The Karta ordinarily manages the business and represents the family in commercial transactions.
• Other members do not automatically possess the same managerial authority as the Karta.
• The rights and liabilities of members are governed mainly by Hindu law rather than the Partnership Act.

Although an HUF cannot itself become a partner in the same way as an individual, the Karta or an individual member may enter into a partnership with another person. In such cases, the individual who signs the partnership agreement is treated as the partner.

In Ram Laxman Sugar Mills v. Commissioner of Income Tax, Uttar Pradesh, the Supreme Court recognised that individual members of one Hindu Undivided Family may enter into a partnership with individual members of another Hindu Undivided Family.

Difference Between Partnership and Hindu Undivided Family Business

The main difference between partnership and a Hindu Undivided Family business lies in their source. Partnership arises through contract, while an HUF business arises through family status. This basic distinction affects almost every other feature, including entry into the business, management, liability, mutual agency, succession and dissolution.

Basis of Creation

• A partnership is created through a contract between two or more persons. No partnership can exist without an agreement, whether written, oral or implied.
• A Hindu Undivided Family business arises from family status. A person may become a member by birth and no commercial agreement is required for such membership.

Section 5 of the Indian Partnership Act clearly excludes family relationships from the scope of partnership unless a separate contract of partnership exists.

Governing Law

• The rights, duties and liabilities of partners are governed by the Indian Partnership Act, 1932 and the terms of the partnership deed.
• The rights and obligations of HUF members are governed primarily by Hindu law, including principles relating to coparcenary, succession, partition and family property.

In Chhedilal v. Commissioner of Income Tax, it was observed that the rights and duties of members of a joint Hindu family business are controlled by Hindu law rather than partnership law.

Membership

• A person becomes a partner only with the consent of the existing partners and after entering into a contractual relationship.
• Membership of an HUF may arise automatically through birth or family relationship, without requiring the approval of existing members.

A partnership therefore has a comparatively fixed membership, while the composition of an HUF may change with births, marriages, deaths and adoption.

Mutual Agency

• Every partner is an agent of the firm and of the other partners for the purposes of the business. Acts done by one partner in the ordinary course may bind the entire firm.
• Members of an HUF are not agents of one another merely because they belong to the same family. An ordinary member cannot automatically bind the HUF business.

The Karta occupies a special position and may bind the family through acts performed within lawful authority.

Management of Business

• Every partner ordinarily has a right to take part in the conduct of the partnership business, unless the partnership agreement provides otherwise.
• The HUF business is generally managed by the Karta. Other members do not enjoy an equal right of management merely because they have an interest in family property.

The Karta takes decisions concerning business operations, borrowing, investment and representation of the family.

Liability for Business Debts

• The liability of partners is generally joint as well as several. A partner’s personal property may be used to satisfy the debts of the firm when firm assets are insufficient.
• The Karta may have personal and unlimited liability in appropriate circumstances, while the liability of other HUF members is generally restricted to their interest in joint family property.

Other members may become personally liable where they separately contract, guarantee a debt or undertake an independent obligation.

Right to Accounts

• Every partner has a right to inspect the books of the firm and obtain complete information regarding its financial affairs.
• An HUF member does not ordinarily enjoy the same continuing right to demand accounts from the Karta merely because of family membership.

In Samalbhai v. Someshwar, the distinction between the accounting rights of partners and members of a joint family business was recognised. An HUF member may seek accounts in circumstances such as partition, fraud or mismanagement.

Position of a Minor

• A minor cannot become a full partner because a minor is not competent to contract. However, a minor may be admitted to the benefits of an existing partnership with the consent of all partners.
• A minor may become a member and coparcener of an HUF by birth and may acquire an interest in joint family property.

The minor’s position in an HUF does not depend on contractual capacity.

Effect of Death

• The death of a partner may dissolve the partnership, unless the partnership deed contains a clause providing for continuation.
• The death of an HUF member does not ordinarily dissolve the family business. The business may continue under the Karta or another eligible family member.

An HUF has greater continuity because its existence is not dependent on the life of any single member.

Dissolution and Partition

• A partnership may be dissolved by agreement, expiry of duration, completion of the business, notice, death, insolvency or an order of the court.
• An HUF business ordinarily comes to an end through partition, complete separation or lawful discontinuance of the business.

Dissolution of a partnership is governed by the Partnership Act, while partition of an HUF is governed by Hindu law.

Separate Legal Position

• A partnership firm is not a separate legal entity distinct from its partners, although it is recognised as a commercial unit for certain purposes.
• An HUF is also not the same as a company or corporation, but it is recognised as a distinct taxable unit under income-tax law.

In Nandchand Gangaram v. M.M. Saddal, the Supreme Court stated that Sections 4 and 5 of the Partnership Act keep a Hindu joint family outside the scope of partnership law.

When to Choose a Partnership

A partnership may be suitable where two or more persons wish to start and manage a business through mutual agreement.

• It may be appropriate where all participants want defined rights, profit-sharing ratios, management powers and responsibilities under a partnership deed.
• It may also be suitable where the business requires active participation, mutual agency, flexible internal arrangements and the introduction of persons who are not related by family.

A carefully drafted partnership deed can clarify capital contribution, profit sharing, retirement, admission, dispute resolution and dissolution.

When to Choose a Hindu Undivided Family Business

An HUF business may be suitable where the business is based on ancestral property, family assets or a long-established family enterprise.

• It may be appropriate where members wish to continue a family-owned business under the management of the Karta without creating a separate partnership among all family members.
• It may also be suitable where continuity across generations and preservation of joint family property are important considerations.

However, the authority of the Karta, rights of coparceners, tax implications and possibility of partition must be properly understood.

Conclusion

Partnership and Hindu Undivided Family business are different legal arrangements despite certain practical similarities. A partnership arises from contract, involves mutual agency and is governed by the Indian Partnership Act, 1932. An HUF business arises from status, is ordinarily managed by the Karta and is governed mainly by Hindu law. 

The distinction affects membership, liability, management, accounts, succession, minors and dissolution. Section 5 of the Partnership Act forms the legal foundation for separating these two forms of business organisation.