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Questions and Answers
What is the nature of liability of a sole proprietor?
What is the nature of liability of a sole proprietor?
- Limited liability
- Joint liability
- No liability
- Unlimited liability (correct)
In a sole proprietorship, who enjoys all the profits of the business?
In a sole proprietorship, who enjoys all the profits of the business?
- Shareholders
- Sole proprietor (correct)
- Creditors
- Employees
What is one characteristic of a sole proprietorship in terms of its legal entity?
What is one characteristic of a sole proprietorship in terms of its legal entity?
- It is not recognized by law as a separate entity from the owner (correct)
- It has a separate legal entity from the owner
- It has limited liability protection
- It is considered a corporation
What is one significant advantage of a sole proprietorship in terms of decision-making?
What is one significant advantage of a sole proprietorship in terms of decision-making?
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Which of the following is true regarding the formation of a sole proprietorship?
Which of the following is true regarding the formation of a sole proprietorship?
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Study Notes
Overview of Hindu Undivided Family (HUF) Business
- HUF business is a unique form of organization primarily found in India.
- It is owned and operated by members of a Hindu undivided family.
Key Roles and Responsibilities
- Karta: The eldest member (male or female) of the HUF, who manages and controls the business activities.
- The Karta has the authority to make all decisions related to the business.
Liability
- Karta's Liability: Unlimited liability; personally accountable for the debts and obligations of the business.
- Co-parceners' Liability: Limited liability, restricted to their share in the business.
Membership
- Minor members can also participate in the business as co-parceners.
Merits of HUF Business
- Effective Control: The Karta's management ensures streamlined decision-making and oversight.
- Continued Existence: The structure allows for ongoing business continuity, even with changes in member composition.
- Limited Liability for Co-parceners: Protects co-parceners by limiting their risk to their investment.
Limitations of HUF Business
- Limited Resources: The business often struggles with fewer financial and physical resources compared to larger entities.
- Unlimited Liability of Karta: Exposes the Karta to significant financial risks.
- Limited Managerial Skills: The Karta may lack expertise in all areas necessary for effective business operations.
Legal and Governance Aspects
- Governed by Hindu law, which defines the rights, responsibilities, and obligations of family members in business.
- The term "co-parceners" refers to HUF members who share ownership of the business and its assets.
Distinct Characteristics
- HUF businesses are characterized by their family-run structure and adherence to traditional practices.
- The head or Karta plays a pivotal role in harmonizing family relations while managing business interests.
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