Formation of NGos

Formation of NGos

SECTION 8 COMPANIES

Under Companies Act, 2013

  • a private company limited by either shares or guarantee or both, or
  • a public company limited by either shares or guarantee or both

may be registered as non-profit organization with social objectives like promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment etc.

Provisions related to incorporation of such non-profit organization is covered under Section 8 of Companies Act, 2013, therefore such companies are known as Section 8 Companies.

It should be noted that unlimited company (whether private or public) cannot be registered as Section 8 Company.

Formation of companies with charitable objects, etc. (Section 8)
Where it is proved to the satisfaction of the Central Government [Power delegated to ROC] that a person or an association of persons proposed to be registered under this Act as a limited company—

  • has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
  • intends to apply its profits, if any, or other income in promoting its objects; and
  • intends to prohibit the payment of any dividend to its members,

the Central Government may,

  • by licence issued in such manner as may be prescribed, and
  • on such conditions as it deems fit,

allow that person or association of persons to be registered as a limited company under this section

  • without the addition to its name of the word “Limited”, or as the case may be, the word “Private Limited”

and thereupon the Registrar shall, on application, in the prescribed form, register such person or association of persons as a company under this section.

 

Note:

  • The company registered under this section shall enjoy all the privileges and be subject to all the obligations of limited companies.
  • A firm may be a member of the company registered under this section.
  • Section 8 Company cannot be incorporated as OPC.
  • Further, Section 8 Company cannot be incorporated as one unlimited company.
  • A company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government.
  • A company registered under this section may convert itself into company of any other kind only after complying with such conditions as may be prescribed.

Revocation of Licence
The Central Government may, by order, revoke the licence granted to a company registered under this section

  • if the company contravenes any of the requirements of this section or any of the conditions subject to which a licence is issued or
  • if the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest

In case of revocation of licence, Central Government may direct the company

  • to convert its status and
  • change its name to add the words “Limited” or “Private Limited”, as the case may be, to its

Special Provisions related to incorporation of Section 8 companies

Before initiation for incorporation of Section 8 Company, all the proposed directors of the proposed company should have a valid DIN (Director Identification Number).

Availing of name
Name availability shall be checked and application to Registrar of Companies (“ROC”) for reservation of name in form “RUN” (Reserve Unique Number) shall be made.

Taking Licence from ROC

  • After obtaining name, an application seeking license for the formation of proposed Company 8 is to be made in e-form INC 12 to the ROC.
  • The ROC may, on being satisfied of the facts of the case, issue a license and allow applicants to be registered as a limited liability company under Section 8 without addition to its name of the word “Limited” or as the case may be, the words “Private Limited”.

Filing of Incorporation Form

  • After obtaining the license number, applicant can proceed further to incorporate a company by filing e-form SPICe along with required attachments.
  • Such application shall be accompanied by the following documents, namely:—
    • the memorandum and articles of association of the proposed company;
    • the declaration in Form No.INC.14 by an Advocate/CA/CS/CMA,
      • that the memorandum and articles of association have been drawn up in conformity with the provisions of section 8 and rules made thereunder and
      • that all the requirements of the Act and the rules made thereunder relating to registration of the company under section 8 and matters incidental or supplemental thereto have been complied with;
    • an estimate of the future annual income and expenditure of the company for next three years, specifying the sources of the income and the objects of the expenditure;
    • the declaration by each of the persons making the application in Form No. INC.15.
  • If concerned Registrar of Companies (“RoC”) is satisfied that all the requirements of the Companies Act, 2013 have been complied with, RoC will register the association of person as a company u/s 8 (1) and will issue a certificate of incorporation carrying a unique Company Identification Number (“CIN”).

MOA/AOA of Section 8 Companies
It may be noted that in addition to all other documents and information required for incorporation of Companies, Memorandum of Association (“MOA”) shall be in the form INC-13 in case of incorporation of Section 8 and AOA shall be in INC 31. The MOA and/ or Articles of Association shall inter alia provide the following:

 i.

The object of the proposed company must be the promotion of commerce, art science, sports, education, social welfare, religion, charity, and protection of environment or any such other object.

ii.  

The proposed company shall intend to apply its profits, if any or other income in promoting its objects and

iii. 

Intend to prohibit the payment of dividend to its members.

 

Exemptions available to Section 8 Company

  1. Section 8 companies cannot be treated as small companies
    As per Section 2(85)[Definition of Small Companies], Section 8 Company cannot be treated as a small company.
  2. Can Section 8 Companies receive contributions from overseas or non-residents?
    Yes, Section 8 Companies receive contributions from overseas or non-residents subject to compliance with the provisions of FEMA
  3. Exempted to suffix Limited/ Private Limited with the name of the company
    Section 8 Companies are exempted from adding the words “Limited” or “Private Limited” behind the name. But it does not affect the limited liability of such company.
  4. Exemptions to Section 8 companies via Notification No. F. No. 1/2/2014-CL.V dated June 5, 2015
    • No CS required in case of Section 8 Companies
      As per Section 203 of Companies Act, 2013 and Rule 8/Rule 8A of Appointment and Remuneration of Managerial Personnel Rules, 2014, every public and private companies having paid-up share capital of 10 crore rupees or more shall have whole-time Company Secretary. The term ‘Company Secretary’ is defined under Section 2(24). But Section 2(24) is not applicable in case of section 8 companies.
    • No need for minimum share capital
      Section 8 company can be incorporated as private company or public company. There is no need for minimum share capital in both cases. Thus, even in case of Section 8 Companies, there is no need for minimum share capital.
    • Shorter length of notice period for AGMs
      A general meeting of a company may be called by giving not less than clear twenty-one days’ notice either in writing or through electronic mode. In case of section 8 company, 14 days’ clear notice is sufficient instead of 21 days.
    • No necessity to record minutes of meetings, unless required
      Section 118 deals with minutes of proceedings of general/board and other meetings. The section shall not apply as a whole [except that minutes may be recorded within 30 days of the conclusion of every meeting in case of companies where the articles of association provide for confirmation of minutes by circulation].
    • Dispatch of financial statements and other documents at shorter length
      According to Section 136, a copy of the financial statements, including consolidated financial statements, if any, auditor’s report and every other document required by law to be annexed or attached to the financial statements shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than 21 days before the date of the meeting. But Section 8 companies may send the audited financial statements 14 days before the date of annual general meeting.
    • Non-applicability of Section 149(1) w.r.t minimum and maximum number of directors
      According to Section 149(1), every company shall have a Board of Directors consisting of individuals as Directors and shall have—
    • a minimum number of three Directors in the case of a public company, two Directors in the case of a private company, and one director in the case of a One Person Company; and
    • a maximum of fifteen Directors.

      Provided that a company may appoint more than 15 Directors after passing a special resolution.

      But in case of Section 8 Companies, there is no restriction on appointment of maximum no. of directors. Further, Section 8 Companies shall have minimum 2 directors (even in case of public companies).

  • No requirement to appoint Independent Directors
    Sub-sections (4), (5),(6), (7), (8), (9), (10) , (11), Clause (i) of sub-section (12) and Sub-section (13) of section 149 and Section 150 [which deals with provisions related to Independent Directors] shall not apply in case of Section 8 companies.
  • Right of persons other than retiring directors to stand for directorship (Section 160)Section 160 deals with right of persons other than retiring directors to stand for directorship. Section 160 shall not apply to section 8 companies whose articles provide for election of directors by ballot.
  • Maximum number of directorships [Section 165]
    No person shall hold office as a director, including any alternate Directorship, in more than 20 companies at the same time. Further, maximum number of public companies in which a person can be appointed as a director shall not exceed 10. But directorship of Section 8 Companies are not reckoned for this purpose.
  • Applicability of Section 173
    According to Section 173(1), every company shall hold the first meeting of the Board of Directors within thirty days of the date of its incorporation and thereafter hold a minimum number of four meetings of its Board of Directors every year in such a manner that not more than one hundred and twenty days shall intervene between two consecutive meetings of the Board. But in case of Section 8 Companies, Section 173(1) shall apply only to the extent that the Board of Directors, of such Companies shall hold at least 1 meeting within every 6 calendar months.
    • It means Section 8 Company is not required to hold the first meeting of BOD within 30 days.
    • Further, Section 8 Company is not required to hold minimum four meetings.
  • Quorum for Meetings of Board (Section 174)

    Section 174(1) states that the quorum for a meeting of the Board of Directors of a company shall be one third of its total strength or two directors, whichever is higher, and the participation of the directors by video conferencing or by other audio-visual means shall also be counted for the purposes of quorum under this sub-section. In case of Section 8 companies the quorum for the board meetings shall be either eight members or 25% of its total strength whichever is less. However, the quorum shall not be less than two members.

  • Relaxation in formation of Audit Committees referred to in Section 177(2)
    Section 177(2) requires audit committee to have majority of independent directors. It is not required for Section 8 Companies.

  • Committees referred to in Section 178 of the Act
    Section 8 companies shall not be required to form the Nomination and Remuneration Committee and the Stakeholders Relationship Committee as provided in Section 178 of the Act, as the section has been exempted from compliance for such companies.

  • Certain decisions by circulation instead of at a meeting
    Section 179(3) deals with resolutions to be passed at meetings of the Board. Section 179(3)(d), (e) and (f) pertains to resolution to borrow moneis, to invest funds of the company and to grant loans or give guarantee or provide security in respect of loans. These items may be decided by the Board by circulation in case of Section 8 companies.

  • Disclosure of interest in related party transactions in some cases only [section 184(2) and section 189]
      • Section 184(2) prohibits participation of interested directors. In case of Section 8 Companies it shall apply only if the transaction with reference to section 188 (related party transactions) on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees.
      • Section 189 deals with register of contracts or arrangements in which directors are interested. Section 189 is applicable to section 8 companies only if the transaction with reference to section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees.

TRUST

In India Trusts are governed by Indian Trusts Act, 1882.

A ‘trust’ is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another or of another and the owner.

Definition of Trust [Section 3]

  • an obligation annexed to the ownership of property and
  • arising out of confidence reposed in and
  • accepted by the owner or declared and accepted by him,
  • for the benefit of another or of another and the owner.

The following are the essential elements of a trust:-

  1. The author or the settler of the trust;
  2. The trustee;
  3. The beneficiary;
  4. The trust property or the subject-matter of trust
  5. The object of the trust;
  6. The instrument of trust.

Author of the Trusts – The person who reposes or declares the confidence

Trustee – The person who accepts the confidence.

Beneficiary – The person for whose benefit the confidence is accepted.

Trust property or trusts money or beneficial interest – The subject matter of the trust.

Instrument of Trust – Instrument declaring the trust.

 

Generally, there are two types of trusts in India:

  • Private trusts and
  • Public trusts

Private Trust

Public Trust

Where the beneficiaries are identifiable and small in number, the trust is Private Trust

Where the beneficiaries are very large in number  (generally public or a section of public), the trust is Public Trust

Such trusts are created for the individual benefit of some person like for the benefit of family members

Such trusts are created for the common benefits of members of society or a caste or a religion like charitable trust and religious trust

Private trusts are regulated by the Indian Trusts Act, 1882

Public trusts are regulated by Indian Trusts Act, 1882 but The Charitable and Religious Trust Act, 1920, the Religious Endowments Act, 1863, the Charitable Endowments Act, 1890, the Societies Registration Act, 1860, and the Bombay Public Trust Act, 1950 are the relevant legislations for the recognition and enforceability of public trusts.

If, however, the beneficiaries are a narrow and specific group such as the employees of a company, then the trust is private.

For example, an industrialist who creates a trust for the benefit of his 5,000 people, their spouses and children is considered private because who the beneficiaries are known.

Examples of Public Charitable Trusts promoted by business families are Paragon Charitable Trust, Sir Dorabji Tata Trust, etc.

 

Exemptions to Trust under Income Tax Act

Exemptions available to Public Trusts registered under Section 12AA of Income Tax Act, 1961

Only Charitable/ religious trust or institution registered under Section 12AA enjoys the exemption

Category of income

Income subject to tax   

Taxability

Donations/voluntary contributions

Voluntary contributions with a specific direction to form part of corpus of trust or institution

Exempted

Voluntary contribution without such specific direction

Forms part of income from property held under trust

Anonymous donations i.e., donations where donee does not maintain record of identity/any particulars of the donor

Donation exceeding higher of:

  •  5% of total donations received by trust or
  • Rs 1,00,000

Taxed at  30% (in case of university, education institution, hospital) – Section 115BBC

Not applicable in case of trust established wholly for religious purpose or religious and charitable purpose

Other Anonymous donations and Anonymous donation received by trust established wholly for religious and charitable purpose

Forms part of income from property held under trust

Income from property held under trust

Income applied for charitable or religious purpose in India

Exempted

Income accumulated or set aside for the application towards charitable or religious purpose in India

At-least 85% of income from property to be applied for charitable and religious purpose in India.

Balance 15% can be accumulated or set aside without paying tax

 

Note:
Where at-least 85% of income of trust or institution has not applied/ deemed to have been applied as above, it is allowed to accumulate or set aside the same and such income shall be exempt if following conditions are satisfied:

  • Such trust or institution furnishes Form No. 10 – notice of accumulation of income by charitable trust or institution electronically on or before due date for filing the return of income;
  • Purpose for which income is being accumulated or set aside shall be mentioned;
  • Income shall not be accumulated for more than 5 years and
  • Money so accumulated or set aside is invested or deposited in specified mode.

No exemption is available to the following incomes of trust/institution:

  • Entire income from property held under trust for private religious purpose which does not benefit the public
  • Entire income of charitable Trust or institution established for the direct or indirect benefit of any particular religious community or caste
  • Entire income and property of the charitable or religious trust or institution is used for the benefit of specified person*
  • Income of charitable / religious trust is not invested as specified
  • Value of medical or educational services made available by any charitable or religious trust running a hospital medical institution or educational institution to specified person*
  • Any income being profits and gains of business unless business is incidental to the attainment of the objectives of the trust / institution and separate books of account are maintained in respect of such business

Specified person for this purpose are as below:

  • Author or founder of trust or institution
  • Any person who has made substantial contribution i.e., contribution of > Rs 50,000 upto the end of financial year
  • In case author, founder or person is HUF, a members of such HUF
  • Trustee/ manager of the trust / institution irrespective of their designation nomenclature;
  • Any relative of any of such author, founder, person who has made substantial contribution, trustee or manager as specified above
  • Any concern in which any of the above specified persons has substantial interest i.e., total contribution of > 50% upto the end of financial year.

Tax exemptions for a Private Trust
A Private Trust may be

  • discretionary (shares of the beneficiaries are unknown and indeterminate) or
  • non-discretionary (shares of the beneficiaries are known and determinate)

The taxability of the Trust depends upon the type of the trust. Basically a Private Trust is not exempted under Income Tax Act, 1961. A trust is chargeable to tax as per the slab rates which are applicable to an individual (not being a senior citizen or super senior citizen).

In the case of a non-discretionary trust, all income is taxable in the hands of the beneficiaries. But if the beneficiaries are minors, the income is to be clubbed with that of the parent with the higher income.

On the other hand, in the case of a discretionary trust, in which the shares of the beneficiaries are unknown and indeterminate, it is taxed in the hands of trust at the maximum marginal rate.

Where any income of such trust consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. [Section 161(1A) of Income Tax Act]

FORMATION OF TRUST

As per Section 4 of the Indian Trusts Act, 1882, a trust may be created for any lawful purpose. The purpose of trust is lawful unless it is:

  • forbidden by law, or
  • is of such nature that, if permitted, it would defeat the provisions of any law, or
  • is fraudulent, or
  • involves or implies injury to the person or property of another, or
  • the Court regards it as immoral or opposed to public policy

According to Section 7, by every person competent to contracts may create trust.

A Trust can be created by any person over 18 years of age and mentally sound and capable of understanding.

Step 1 – Decide the following

  • Name of the trust
  • Address of the trust
  • Objects of the trust (business/charitable/Religious)
  • One settler of the trust
  • Two trustees of the trust
  • Property of the trust
  • Normally a small amount of cash/cheque is given to be the initial property of the trust, in order to save on the stamp duty.

Step 2 – Creation of a Trust Deed
A trust is created when the author of the trust indicates with reasonable certainty by any words or acts:

  • an intention on his part to create thereby a trust;
  • the purpose of the trust;
  • the beneficiary, and
  • the trust property;

Author shall transfer the trust property to the trustee except where a trust is declared by Will or the author of the trust is himself to be the trustee.

Further, trust deed shall contain following information:

  • the name(s) of the author(s)/settlor(s) of the trust;
  • the name(s) of the trustee(s);
  • the name(s) if any, of the beneficiary/ies or whether it shall be the public at large;
  • the name by which the trust shall be known;
  • the place where its principal and or other offices shall be situate;

Certainties of a Trust
For creating a trust the author of the trust should indicate with reasonable certainty the following:

  • Certainty in words: The words used to create a trust must be clear and certain so as to explain a clear intention to create a trust. Recommendatory words like “I hope” “I wish” are not sufficient.
  • Certainty in the object of the trust: The beneficiary, for whose benefit the trust is created, must be shown clearly.
  • Certainty in the subject-matter of the trust: The subject matter of the trust must be clear, i.e., the property, in respect of which a trust is created, must be shown clearly. Purpose of the trust should be certain.

Step 3 – Signing and Printing of Trust Deed

  • Obtain the signatures of Settlor, Trustees and Witnesses at the appropriate places. Their photographs and Identity proof is also to be furnished.
  • The Deed must be witnessed by at least two witnesses.
  • The Settlor must sign all the pages of the Trust Deed.
  • Print the Trust Deed on stamp paper of appropriate value, depending on the stamp duty applicable in the State of execution.

Step 4 – Registration of Trust Deed

  • Register the Original deed in a Sub-Registrar office paying registration charges. A photocopy of the Deed is also required to be submitted. The photocopy of the Deed should also contain the signature of settlor on all the pages.
  • At the time of registration, the settlor and witnesses must be personally present with their identity proof in original.
  • The Sub- Registrar retains the photocopy and returns the original copy of the Trust Deed.

Documents Required to be Submitted at the Time of Registration

  • Trust Deed (One Original and one photocopy)
  • Self-attested copy of the proof of identity of the settler (Aadhaar card, passport, voter ID, driving license or any such photo ID)
  • Self-attested copy of the proof of identity of each trustee (Aadhaar card, passport, voter ID, driving license or any such photo ID)
  • Proof of the registered office address of the Trust (electricity/water bill or registration certificate)
  • Non Objection letter signed by the landowner
  • Registration fee

Step 5 – Registration of Trust under Tax Laws and opening bank account

  • The Trust shall apply for a PAN and open a bank account for it as it is a separate entity under Income Tax Act.

Societies

A registered society is a legal entity but it is not a body corporate. It is separate from its members. It can own properties. It is capable of suing or being sued.

This form of entity is used to carry on various welfare, charitable and religious activities.

According to Section 20 of the Societies Registration Act, 1860, a society may be registered for

(i) Grant of charitable assistance.

(ii) Creation of military orphan funds.

(iii) Promotion of –

  • Science, Literature, Fine Arts
  • Instructions or diffusion of useful knowledge
  • Diffusion of political education
  • Foundation or maintenance of libraries or reading rooms
  • Public museum and galleries of paintings, Works of art
  • Collections of natural history
  • Mechanical and philosophical investments
  • Instruments
  • Designs

    Various States have added other objects like social welfare, sports & games, environment, compassion of living creatures, recreation, athletics, cultural activities, research work, welfare of physically handicapped etc.

Advantages of Society

  • The process of formation and registration is simple.
  • Record-keeping requirements are minimum and compliance with regulations is easy.
  • Cost of compliance is low.
  • Least possibility of interference by the regulator.
  • Exemption from tax due to charitable nature of operations.
  • Under Income Tax Act, and subject to fulfilment of certain conditions, a society can avail of exemption from income tax, if it obtains registration under Section 12A/12AA of the Income Tax, 1961.
  • As every society is a legal entity distinct from its members, it is capable of filing suits against any person or any member. Similarly, suits can also be filed against the society. A registered society can file a suit anywhere in India and in any State although it may not be registered in that particular state.

Disadvantages of Society

  • Tax exemption extended to societies may apply to public trusts only to the extent the Income Tax department accepts their activities as being charitable.
  • it is an inappropriate form of a commercial venture
    • since such institutions are of charitable nature;
    • the concept of equity investment or ownership is virtually absent
  • Lack of professionalism and managerial practices
  • In accordance with Section 45S of the RBI Act, 1934, no unincorporated bodies are allowed to accept deposits from the public. Organisations registered under the Societies Registration Act and the Trust Act are considered unincorporated bodies. Hence, legally speaking, they are not allowed to collect savings from their clients.
  • Every society should get its accounts audited once a year by duly qualified auditor and have balance sheet prepared by him.

Tax Benefits of forming a society

  • Under Income Tax Act, a society can avail of exemption from income tax, if it obtains registration under Section 12A/12AA of the Income Tax, 1961.
  • Donors to societies may claim a rebate under Income Tax Act for donations made to the Society, provided the society has applied and obtained approval under Section 80G.

FORMATION OF SOCIETIES

Minimum 7 individuals required to register a society. A society may be registered for the promotion of literature, science or fine arts or diffusion of useful knowledge and political education or charitable purposes.

Documents required to be filed with the Registrar of Societies for registration of a society:

  1. Covering letter requesting for registration stating various documents annexed to it addressed to the registering authority and signed by all the subscribers to the Memorandum or by a person authorised by all of them.
  2. Memorandum of Association (in duplicate) containing
    • name of the society;
    • the objects of the society;
    • the names, addresses and occupation of the members of the governing body;
    • the place of registered office of the Society, and
    • the names, addresses and full signatures of the seven or more persons subscribing their names to the memorandum of Association. Their signatures should be witnessed.
  1. Rules & Regulations/Bye-laws (in duplicate) duly signed by atleast 3 members of the governing body.
  2. Affidavit on non-judicial stamp paper of requisite value by the President or secretary of the society duly attested by Oath Commissioner or Notary Public or Magistrate of first class.
  3. Documentary proof such as rent receipt or property tax receipt in respect of the registered office of the Society or no-objection of the owner of the premises.
  4. Registration fee in cash or by demand draft.

All the above documents have to be submitted to the Registrar of Societies along with the requisite fees in two copies. On receiving the application, the registrar will sign the first copy as acknowledgment and return it while keeping the second copy for approval. On proper vetting of the documents, the registrar will issue an Incorporation Certificate by allotting a registration number to it.

The formalities and requirements may differ from State to State. Hence, it is advised that the applicant should contact the registering authority of the State in advance.

On registration, the society becomes a legal entity or a judicial person apart from its members. Its Rules & Regulations bound its members. It must confine its activities to the sphere embraced by its objects. A non-registered society may exist in fact but not in law. An unregistered society cannot claim benefits under the Income tax Act, 1961.

Selection of a Name of a society
When selecting a name for society registration, it is vital to understand that according to Society Registration Act, 1860, an identical or similar name of a currently registered society will not be allowed. Moreover, the proposed name shall not suggest any patronage of State Government or Government of India or contravene the provisions of the Emblem & Names Act, 1950.

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