ALL ABOUT HUF FORMATION

HUF Formation

A Hindu Undivided Family (HUF) is a kind of an entity that could be a launching pad to the entrepreneur who wishes to have a smoother foray into the world of business, thanks to the tax benefits and lesser compliance requirements.

HUF is a unique type of legal entity which derives its roots from Hindu Law. HUF is an entity as a family, which consists of male lineally descended from a common ancestor. The members of the family would also include their spouses and unmarried daughters. Given the nature of the entity, the relation of HUF’s arises from status and not legal contracts. This article seeks to guide the aspiring entrepreneur on the formation of a HUF.

Members

A HUF could be formed by a married couple, whose child would be integrated into the entity after his/her birth. The entity cannot be formed by a person of another religion, except for Sikhism and Jainism.

On a detailed note, the members of a HUF include a Karta, members, and coparceners. The Karta heads the family and is vested with the decision-making responsibilities. Any male member could play the role of a Karta with the consent of the family members.

A coparcener is a person who is entitled to his/her share of the property. A coparcener is classified into the following hierarchies:

• A first-degree coparcener could be a first-time holder of ancestral property.
• A second-degree coparcener includes the sons and daughters of the family.
• A third-degree coparcener includes the grandsons and granddaughters of the family.
• A fourth-degree coparcener includes the great grand-sons of the family.

The HUF wouldn’t cease to exist on the death of a sole male member. It would continue to function with the existing female members. However, a widower to a Karta cannot be considered as an heir to the throne.  An adopted child is entitled to membership but cannot be a coparcener.

HUF Deed

HUF may be formed with or without a legal deed, though it is always advisable to pursue a business with a written document. With respect to a HUF, a legal deed consists of details pertaining to membership of the HUF, the source of funds, and the likes of it. The Deed acts as proof of the existence of the entity that has been formed.

The document should include a declaration by a family member with respect to the name of the Karta, powers vested with the Kartha, and the entitlement of the Kartha to hold the transactions on behalf of its members. In addition to it, the document should state the capital that was invested in forming the HUF.

PAN

Followed by the formation of a deed, the Karta is required to obtain a PAN Card, which is an important document for pursuing financial transactions. The application for PAN must be made in Form 49A, either online through the NSDL website or through manual means.

The PAN Card must be used by the entity for the filing of income tax returns and claiming applicable deductions. The application for PAN and income-tax return should consist of the signature of the Karta.

Separate Bank Account

As implicit as it might sound, it is mandatory for a HUF to function with a bank account, wherein the funds of the entity can be maintained. The bank account must be strictly maintained for business purposes, and shouldn’t include the savings of any member.

What is NET WORTH ?

Net worth is your assets subtract your liabilities. Okay, if that resonates with you, that's great ! But let me start in more relatable terms.

Your net worth is everything you own minus how much debt you owe. Some spend money like their credit card is limitless or like they don't have a large mortgage in their name. Sure, the bank might not come after you like a shark but that doesn't mean they won't eventually get back the money that you owe them.

Spending habits CANNOT only consider money that you have but has to consider money that you owe. An expensive dress, t-shirt or luxury car should only be purchased when your net worth allows, not when your credit card limit does.

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Difference between Bookkeepers and Accountants

There is often a misconception that bookkeeping and accounting are the same thing. While they both work to assist you with your finances, there are some important distinctions between the tasks of a bookkeeper and an accountant. From the outset, it is important to understand that both bookkeepers and accountants are integral parts of your business. While their tasks can sometimes overlap, there are definitely certain aspects of your business that you would specifically entrust to an accountant, and others that you would give to your bookkeeper.

In simple and very general terms, a bookkeeper will likely be the person that assists you with the ongoing financial recording and transactions that keep your business running smoothly. Your accountant, on the other hand, will be the person who analyses the data produced by your bookkeeper, reports on it, and is best suited to give you financial advice. Your accountant will also have a strong understanding of your taxation requirements, and will be best able to assist in that area.

In order to understand more comprehensively the benefits that both bookkeepers and accountants can offer to your business, it can be helpful to be aware of the tasks that each could be expected to undertake.

Bookkeepers, as previously stated, are instrumental in the ongoing financial upkeep of your business.

Some tasks that are regularly undertaken by your bookkeeper can include:

• Processing invoices, receipts, payments, and other financial transactions
• Processing and maintaining your payroll system
• Preparing initial financial statements
• Reconciling accounts and preparing reconciliation reports
• Managing your accounts receivable and accounts payable, i.e. amounts owing by debtors, and amounts owing to creditors
• Calculating GST
• Preparing and lodging your BAS
• Designing, establishing and reviewing accounting systems

There are a wide variety of other tasks that a bookkeeper can undertake, and much like the tasks outlined above, they are generally related to the ongoing maintenance of your financial records.

While an accountant will also be qualified to assist you in these areas, it is important to be aware that there is likely to be a substantial difference in fees charged by bookkeepers and accountants. In order to best utilise your budget, extensive consideration into which tasks are to be delegated to a bookkeeper or an accountant is advised.

The role of an accountant in your business, while potentially encompassing some bookkeeping tasks, is often more advisory and analytical in nature. An accountant will be in a position, through analysis of past performance, to offer financial projections and advice on future financial elements of your business.

Further services offered by your accountant can also include:

• Taxation advice and planning
• Business establishment assistance
• Auditing
• Corporate reporting and compliance
• Superannuation fund advice
• Financial management advice

While not an exhaustive list of an accountant’s services, the tasks outlined here serve to highlight the analytical and advisory nature of their position.

Given that there are substantial differences between the services offered by bookkeepers and accountants, it can be seen that both are important to the growth of your business. Instead of viewing them in a ‘bookkeepers vs accountants’ situation, it is important to understand that your accountant and bookkeeper work best together to serve the financial requirements of your business.

Why is Financial Accounting Important for your Business

There are multiple transactions that take place during the year therefore, it is important to have a record of those transactions. Financial accounting helps internal and external stakeholders make better business decisions. Without financial accounting, decision-making can have a negative impact on the company’s performance. This is the reason the importance of financial accounting cannot be neglected.

Maintaining Financial Transactions
Every business needs to keep a record of the transactions it makes irrespective of its volume. Accounting uses a double entry system which means there are always two accounting entries for a transaction. A double entry system records both sides of a transaction which have two equal and opposite effects in at least two different accounts.

For example, if you purchase a machine in cash (for Rs.100000), you debit machinery account and credit the bank account.

Fulfilling Tax Obligations
Maintaining books of accounts makes it easier to pay tax. The reason being, all bills, and other transactions are recorded and kept in one place. You do not need to make corrections at the last moment. Thus, an organized Balance Sheet, Cash Flow Statement and Profit and Loss Statement can benefit in planning tax returns.