Updated: Jan 23, 2021
For the most part, businesses in India look a lot like businesses in the United States. General partnerships, corporations, limited liability companies, and sole proprietorships all exist, although some go by different names. One unique structure that India’s culture has fostered is the Hindu Undivided Family (HUF). The strong value placed on relationships, hierarchy, and top-down decision making are all distinctly apparent in this Indian business structure, though its role may be changing.
HUFs generally consist of “all persons lineally descended from a common ancestor and includes their wives and unmarried daughters.”1 Under this system, a karta, or a manager (often the patriarch or oldest son of the family) is responsible for managing the assets of the HUF. The HUF is a distinct taxable unit, and so members of an HUF are not subject to individual taxes on the amounts they receive from the HUF. The tax benefits don’t always outweigh the costs though.
HUFs are relatively easy to set up but can be difficult to break or modify. Because they are designed to keep property and assets together, HUFs can’t be partially dissolved, or rather, individual members can’t withdraw their interests without completely dissolving the HUF. Partitioning HUFs can lead to heavy taxes. The karta also can’t dictate who gets shares in an HUF, or how big those shares are; those elements are dictated by law.2 The challenges of new members, differing lifestyles, unclear lines of succession, and simple family conflict all take their toll on these businesses. Most family businesses in India last for about three generations before splitting.3
Hierarchical. Compared to many other countries, especially the United States, India is far more hierarchal than egalitarian.4 These values are clear in an HUF, where having a karta act as the boss helps to limit the consequences of conflict that might arise between members of the business. For a business that can’t always limit its number of members, respect for the leader becomes increasingly important. The reluctance of younger members to voice disagreement with the karta, or even older members, can also hurt a business facing modern issues.
Decision Making. Along a similar line, India follows a top-down decision-making approach.5 This cultural element allows HUFs to operate more easily because decision-making authority is centered with the karta. When conflict arises between members, the HUF could have a difficult time completing the simplest of transactions.6 However, having a single decision maker can help the business act decisively and move past issues that could prevent it from operating.
Relationship Based. In India, personal relationships are essential to business relationships.7 This is especially true for family businesses, where personal relationships are business relationships. Because family members can do very little to shut each other out of an HUF, maintaining positive relationships with each other is critical to the survival of the business. Sorting out HUF membership interests can take years to unravel if interests are transferred unexpectedly.8 Having strong personal connections helps prevent these complications and makes business transactions smoother.
Historically, sons and grandsons would receive an interest in the HUF equal to their father’s, but daughters would only receive a portion of their father’s interest. The Hindu Succession (Amendment) Act of 2005 made daughters’ inheritance rights equal to sons’, and a 2015 ruling confirmed that women could serve as kartas by virtue of birth order.9 John Ward, Professor of Family Enterprise at the Kellogg School of Management, believes that the shift to include women will help reduce the rate at which Indian family businesses split. As he states, “A family that only has brothers at the helm is the most unstable form of business enterprise. Brothers often end up with ego issues. If you involve daughters and other members then the bond is stronger.”10
Many HUFs turn to their younger members to solve new and complex issues. This makes sense—the younger generation is often more educated and open to new concepts. However, respect in these organizations often means remaining silent rather than disagreeing, so members of the younger generation may still remain silent on issues they have ideas about. The younger generation is frequently responsible for executing the decisions of the older generation, especially regarding succession. If the participants don’t agree with the plan, they won’t act on it, even if a legal document exists.11
Although HUFs may continue to be used as a family business structure, they are less common than in the past. Evolving business environments will undoubtedly lead to changes in how these businesses are run, but they continue to highlight major characteristics of business culture in India.
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