Non-profit Company

In India, a non-profit organisation can be registered as trust by executing a Trust deed or as a Society under the Registrar of Societies, or as a non-profit company under Section 8 Company of the Companies Act, 2013. Section 8 companies are similar to Trust or Society except for one factor that is a section 8-company register itself under Central Government’s Ministry of Corporate Affairs. In contrast to, Trust or Societies, which gets registered under State Government regulations.

Section 8 company is a company established with the objects of promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object’, and apply all its profits and other income for promoting only the objects of the company and do not pay any dividend to its members.

To establish a Section 8 company, one needs to acquire the license and its essential to follow the annual compliances with the Ministry of Corporate Affairs (MCA) for the smooth operation of the company.

Characteristics Of A Section 8 Company

It must have at least 2 shareholders.
It must have at least 2 Directors
The director and shareholder can be the same person
At least one of the directors shall be a resident of India
Prohibited from paying any dividend or profit to its members.
Profit and other income are applied only for promoting the objects of the company.
Yearly filing of accounts, reports and the returns of the Association with the ROC is required to meet the compliance required.

Advantages Of Section 8 Company

A section 8 company yields an array of benefits, unlike a Society or Trust. Following is the list of advantages for companies registered under Section 8:

Tax benefits: Since Section 8 companies are a non-profit organization, so they leverage the exemption from the provision of income tax. The companies also get various other tax benefits and deductions. They employ many perks under section 80G of the Income Tax Act.
Foreign Fund & Donation: A section-8 Company can accept contributions and donations from the foreign nationals and organizations by obtaining license under Foreign Contribution and Regulation Act (FCRA).
All India operational convenience: Since the Section-8 Company is incorporated as per the central law and under the Ministry of Corporate Affairs; it can operate in any part of the country and can easily change its registered office from one state to another. It can also hold property or land in any part of the country.
Credibility: Section 8 Company has more reliability than any other form of a philanthropic/charitable organization.
Zero Stamp Duty: A Section 8 company do not have to pay stamp duty on the AOA and MOA at the time incorporation of the Company which other companies surely pays.
The ease at transferring ownership/title: The transfer of ownership and management of the Section-8 company is easy and transparent compared to society or trust. The limited liability companies don’t have the advantage to transfer their title or ownership, but the Income Tax Act, 1961 does not confide Section 8 companies to transfer their ownership or title thereby, enabling the transfer of both movable and immovable interest without any hurdles or restrictions.
Minimal share capital: Unlike the other limited companies like public, private, or one person, a Section 8 company does not need much share capital to set up the entity. The members can directly use the funds from their subscriptions or donations.
Property Management: The ownership of the property lies in the name of the Company, and it can only be sold as per the rules mentioned under the Companies Act. (Ex: With the consent of the Board of Directors in the form of a resolution).
Exempted from any name: In opposes to other companies who are under obligation to use their company’s name as ‘limited company’, section 8 companies get exempted from the use of any title. Thus, they can perform their functions without updating the public about their limited liability status.
Separate legal entity: Section 8 company has a distinct legal entity, which means the company’s existence is different from its members. The company has a perpetual existence along with greater flexibility.
Transparency: Unlike Trust or Society, the legal status, director details and financial status of the Section-8 company is transparent. Such details are available in the website of Ministry of Corporate Affairs. Any person who makes prescribed fees to the Ministry, can inspect the section-8 company records. Hence, it will increase the trust and transparency about the company from the public at large.

Disadvantages Of Section 8 Company

Following are the drawbacks that every company registered under Section 8 has to bear:

No distribution of profits: The members of a Section 8 company cannot share the profits amongst them. The profits get used only for the welfare of the company’s objective, which revolves around the advancement of art, science, commerce, sports, environmental protection and fields of such sort.
Amendment in MOA and AOA: Such an entity can amend or alter the Memorandum of Association or the Articles of Association by filing the respective forms and documents with the Registrar of Companies.
Zero benefits: The members of a Section 8 company gets zero benefits or any perks out of the company. They can afford to reimburse for their pocket expenses that may have occurred during the course.
Limited objective: The central objective of Section 8 companies is to use the income and profits of the company in promoting some particular fields only and not for any other purpose.

Incorporation Process

Private Limited Company and Section 8 company registration procedure are very similar to each other. A minimum of two Directors is required to start a Section 8 company. One of the Directors must be an Indian Citizen and Indian Resident - whereas one or more persons acting as Director can be an Indian National or Foreign National. In addition to the required number of persons, a registered office address within India would be required for the Section 8 Company shall, on application, in the prescribed form, register such person or association of persons as a company under this section.

Step-By-Step Registration Procedure

Obtain Digital Signature Certificates for Directors
Apply for Director Identification Number for proposed Director.
Application for name availability in form RUN
Preparation of Memorandum of Association and Articles of Association
Application for license under Section-8 to the Regional Director/Registrar, Ministry of Corporate Affairs.
Filing of final incorporation documents with the Registrar for approval.
Obtaining Certificate of Registration.