Family businesses often welcome active participation of junior family members, as their skills and contributions can be valuable. However, while families encourage their younger members to take an interest in the business, there exists a complex and often unclear legal framework regarding their involvement.
Indian Contract Act of 1872, scrutinizes whether a person is capable of entering into contracts, a key consideration when involving minors in business activities. This act sets forth specific criteria for determining an individual’s contractual capability, establishing whether they have the legal capacity to enter into contracts. Notably, individuals who are minors, meaning those who have not yet reached the age of eighteen, are not considered legally competent to enter into contracts. In instances where a court-appointed guardian operates under the Guardian and Wards Act of 1890, the age at which an individual is classified as a minor extends to twenty-one years. It is crucial to understand that contracts made with minors are inherently void-ab-initio, indicating their invalidity from the very outset, with a few exceptions. The involvement of minors in business is intricately tied to these fundamental legal principles.
Further are various business scenarios considering the involvement of minors:
Participation in a Private Limited Company:
To participate in a private limited company in India, individuals can assume two key positions: Director and/or Shareholder.
- Directorship by a minor: For someone to be appointed as a director in any company, they must hold a valid Director Identification Number (DIN), and to obtain DIN, one must have reached the age of majority. Consequently, minors cannot possess DIN or become directors in Indian companies.
- Shareholding by a minor: The Companies Act of 2013 allows minors to hold shares provided they have the consent of their guardian. However, as the holding of shares in a company involves a contractual agreement with the company, and as per the Indian Contract Act of 1872, minors cannot legally enter into contracts. Thus, they cannot directly hold shares during a company’s incorporation by way of subscription, as this process constitutes a contractual arrangement. Even after the incorporation of the company, a minor cannot purchase shares directly, as such a purchase would be considered an agreement. Shares in any company can only be held by a minor if they are gifted by another adult. Furthermore, these gifted shares must be fully paid up since minors cannot be held responsible for unpaid shares.
In cases involving the transfer of shares from the guardian of a minor, the guardian holding these shares functions as a trustee until the minor reaches the age of majority.
Participation in Limited Liability Partnership (LLP):
In the context of Limited Liability Partnerships, individuals can participate as normal partners or designated partners.
- Minor as Designated Partner: Similar to the requirement for directorship in a company, becoming a designated partner in an LLP necessitates obtaining a Director Identification Number (DIN) or Designated Partner Identification Number (DPIN). Hence, minors are ineligible to hold these positions and cannot become designated partners in an LLP. A designated partner in an LLP holds responsibilities for the operations and compliance of the partnership.
- Minor as Partner: A minor can be admitted to an LLP, but their role is limited to sharing profits; they cannot participate in partnership activities, and their property cannot be used to settle the LLP’s liabilities.
Participation in Partnership Firm:
Much like in the case of LLPs, in a partnership, a minor can be admitted only as a “partner for benefits.” The rights and liabilities of such partners differ from those of other partners. Upon reaching the age of majority, the minor partner has the option to choose whether to continue as a full partner in the partnership firm. This choice must be made within six months from attaining majority or gaining knowledge about their share in the firm.
Sole Proprietorship Business:
Minors are not permitted to initiate a sole proprietorship business since this type of business carries unlimited liability. Minors cannot be held liable for business activities, and they are not legally allowed to enter into contracts with third parties. Therefore, commencing or planning to start a sole proprietorship business is not feasible for minors and is not legally valid due to their incapacity to enter into agreements.
In conclusion , involving minors in business is allowable, but it entails specific legal constraints. Minors enjoy restricted rights in such situations and are not to be held accountable for business obligations. Typically, any income earned by a minor is subject to taxation in the hands of their parents or guardians, following specific statutory provisions. To navigate this complex terrain successfully, it is crucial for businesses and guardians to possess a thorough understanding of these legal intricacies when engaging minors in business activities, ensuring full compliance with the law. Striking the delicate balance between fostering youthful contributions and protecting their rights underscores the challenges encountered by family-run businesses in India.