A company is referred to as a Section 8 Company when registered as a Non-Profit Organization (NPO) i.e. when it has the motive of promoting arts, commerce, education, charity, protection of the environment, sports, science, research, social welfare, religion and intends to use its profits (if any) or other income for promoting these objectives.
In India, businesses are often associated with profit-making objectives, but there are legal structures that prioritize social welfare over financial gain. One such entity is a Section 8 Company, which is established with the primary goal of promoting social, charitable, and not-for-profit activities. These companies play a crucial role in various sectors, including education, environmental conservation, healthcare, and social welfare. This article delves into the concept, characteristics, benefits, registration process, and compliance requirements of Section 8 Companies.
What is a Section 8 company?
A Section 8 Company is a special category of company defined under Section 8 of the Companies Act, 2013. Its primary objective is to promote commerce, art, science, sports, education, research, social welfare, religion, charity, and environmental protection. Unlike traditional businesses, these companies do not distribute profits as dividends to their members. Instead, any income or surplus generated is reinvested to fulfil the company’s objectives.
The Section 8 company is considered an upgraded form of NGO registration compared to societies and trusts, offering numerous advantages for charitable institutions. It has become the most popular choice for NGO registration in India due to its ease of registration, operation, and management.
The primary objective of a Section 8 company is to promote non-profit causes encompassing areas such as commerce, art, science, sports, education, research, social welfare, religion, charity, environmental protection, and other charitable purposes.
Starting from April 1, 2021, it is mandatory for all NGOs to file Form CSR-1 on the MCA (Ministry of Corporate Affairs) portal to register with the Central Government. This initiative aims to enable efficient monitoring of CSR (Corporate Social Responsibility) expenditures throughout the country. The MCA has made the CSR-1 Form available on its website, and it is now a necessary requirement for social organizations seeking CSR funds or acting as CSR implementing agencies to submit this form.
Laws in India applicable to an NGO
NGOs can be registered in India under any of the following laws:
- Trust under Indian Trusts Act, 1882
- Society under Societies Registration Act, 1860
- Section 8 of Companies Act, 2013
Various Advantages of Section 8 Company Registration
Section 8 Companies enjoy various tax benefits under the Income Tax Act, 1961, including exemptions and the ability to obtain 80G and 12A registrations, which allow donors to claim tax deductions. Their registration under the Companies Act and regulation by the Ministry of Corporate Affairs (MCA) grant them higher credibility compared to trusts and societies. Despite being registered companies, they have relatively simpler compliance requirements than other corporate entities. Additionally, these companies are often eligible for government grants, financial aid, and CSR (Corporate Social Responsibility) funds from both government and private organizations. Another significant advantage is their perpetual existence, meaning they continue to function regardless of changes in management or membership, unlike sole proprietorships and partnerships that dissolve upon the owner’s departure.
- Plenty of Exemption and privileges as per Companies Act, 2013
- The company gets an exemption from paying stamp duty.
- Privilege in the deduction of taxes to the donor of the company.
- Receipt of Funds in the form of donations.
- Easy transfer of shares
- Exemption for keeping suffix, titles.
Purpose of NGO – Section 8 Company Meaning
The main purpose of establishing a company as a Section 8 company is to promote non-profit objectives such as the following:
- Commerce
- Art
- Science
- Sports
- Education
- Research
- Social welfare
- Religion
- Charity
- Protection of environment
- Any such other object related to the above objects
When the Central Government is satisfied that a person or association of persons propose to establish a limited company having the above-mentioned objectives, it shall grant a license to register as a Section 8 company under the Companies Act, 2013 (‘Act’).
The profits/incomes of the Section 8 company, if any, are applied towards promoting the objectives of the company and are not distributed as dividends to its shareholders.
Last name attached to the company under section 8 Company Registration
As the government allows their companies to register as ‘limited’ companies but these types of companies cannot use the word ‘Limited or Private Limited’ after their name.
The word which is allowable are as follows:
- Confederation
- Foundation
- Association
- Forum
- Council
- Chamber
- Electoral trust
Section 8 Company Registration Eligibility
- An Individual, HUF is eligible to start a Section 8 company in India.
- Two or more persons who will act as Directors or shareholders should fulfil all the compliances and requirements of the Section 8 company incorporation under the Act.
- There must be at least one director who should be a resident of India in the Section 8 company.
- The objective must be one or more of the following – promotion of sports, social welfare, the advancement of science and art, education and financial assistance to lower-income groups.
- Founders, directors, members directors of the company cannot draw any remuneration in any form of cash or kind.
- No profit should be distributed among the members and directors of the company directly or indirectly.
Section 8 Company Incorporation Requirement
Directors
A minimum of two directors is required if the Section 8 company is to be incorporated as a private limited company, and a minimum of three directors in case of incorporation as a public limited company. The maximum number of members is 200 in the case of a private limited company, whereas for a public limited company, there is no such limit.
Capital Requirement and Name
There is no requirement of minimum paid-up capital in the case of a Section 8 company incorporation. NGOs established as a Section 8 company need not use the words ‘Limited’ or ‘Private Limited’ in their name.
Charitable Objects
Section 8 companies are incorporated with non-profit objectives. The MOA and AOA must mention the non-profit objective or purpose for which it is established. Any profits earned by the section 8 company is utilised for the furtherance of its main objectives, i.e. charitable purposes or reinvested in the company. The profits will not be distributed among its members.
Management
Section 8 company is managed by the Board of Directors as per the MOA and AOA of the company, unlike other trusts that are managed by the Trustees as per the Trust Deed.
Regulation under Various Acts
A Section 8 company needs to follow the rules and regulations prescribed under the Companies Act, 2013. It needs to maintain books of account, and file returns with the Registrar of Companies. Section 8 company cannot make any changes to the provisions of MoA and AoA without the prior approval of the Central Government. It also needs to follow the provisions of the Income Tax Act and GST Law.
Obtain DSC (Digital Signature Certificate)
Digital signatures of the proposed directors of the company are required as the forms for the registration process are filed online and should be digitally signed. Digital signature certificates (DSC) are issued by a government recognized certifying agencies. The list of such certified agencies can be accessed here. The cost of obtaining a DSC varies depending upon the certifying agency. You must obtain a Class 3 category DSC.
Apply for Director Identification Number (DIN)
You have to apply for a DIN for the proposed directors of the company. The application for allotment of DIN has to be made in Form DIR-3 or along with the SPICe+ form for registration. You have to attach the scanned copy of the necessary documents such as a self-attested copy of PAN, Identity and Address proof of directors along with the form and submit it online on the MCA Portal. The form must be attested by a practising professional who can be a chartered accountant, a company secretary, or a cost accountant.
What is the process for registering a Section 8 company?
The process of Section 8 Company Registration involves the following steps:
- Name Reservation
- The applicant must apply for name approval through the Reserve Unique Name (RUN) service on the MCA portal.
- The name must include words that reflect the company’s charitable objectives, such as Foundation, Society, Association, Council, or Organization.
- Digital Signature Certificate (DSC)
- Since all filings are done online, the company’s proposed directors must obtain DSC, which allows them to digitally sign documents.
- Director Identification Number (DIN)
- Directors must apply for a Director Identification Number (DIN) if they do not already possess one.
- Application for License
- The applicant must file Form INC-12 with the Registrar of Companies (RoC) to obtain a license to operate as a Section 8 Company.
- Along with the application, the Memorandum of Association (MoA) and Articles of Association (AoA) should be submitted, specifying the company’s objectives.
- Incorporation Filing
- Once the license is approved, the applicant files SPICe+ (INC-32) for incorporation along with necessary documents like PAN, Aadhaar, and address proofs of directors.
- Certificate of Incorporation
- Upon verification of documents, the Registrar of Companies (RoC) issues the Certificate of Incorporation, officially recognizing the entity as a Section 8 Company.
Filing of Section 8 Incorporation Forms on the MCA Portal
Once you have received approval from the regional director, you can proceed with filing the Section 8 company registration application along with the necessary documents on the Ministry of Corporate Affairs (MCA) portal. Ensure that you provide all the required clarifications to the Registrar of Companies (ROC) during this process. Upon satisfactory submission of documents, the ROC (Registrar of Company) will issue a Certificate of Incorporation, along with a distinctive Company Identification Number (CIN). This process is carried out in accordance with the requirements of SPICE plus (Spice +).
Submission of MoA and AoA
Once you have obtained the license, you will need to draft the Memorandum of Association (MoA) and Articles of Association (AoA) to complete the Section 8 company registration application.
PAN, TAN, and Bank Account
Before proceeding with the registration of your Section 8 company, ensure that you have obtained your Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN), and have a bank account ready for the company.
Registration of a Section 8 company in India is a unique process.
FAQs on Section 8 Company Registration
Statutory obligation under Section 8 Company Registration?
- The objective of the company should be achievable from the revenue and surplus generated by the operation of the company.
- The appointment of a company secretary is not necessary.
- No commissions and incentives will be provided to the members or directors of the company.
- An individual who wants to become a member or director of a company needs to bring any minimum share capital in Section 8 company registration.
- The director of the company can take a position in any other company.
- By giving short period notice annual general meeting of the company can take place.
- The objective and policy of the company can be not be altered by the company, for alteration prior permission from the central government of India is needed.
- If the company has obtained 80G or 12A registration from the income tax authority then the profit which has been earned by the company is hundred percent tax-free.
Annual Compliances for Section 8 company?
- Minimum of two board meetings: Section 8 companies are required to conduct a minimum of two board meetings in a year.
- Maintenance of Books of Accounts: Proper books of accounts must be maintained, including records of financial transactions, assets, liabilities, and income and expenditure.
- Preparation of Financial Statements: Section 8 companies need to prepare annual financial statements, including the balance sheet, profit and loss (P&L) account, and cash flow statement.
- Mandatory Audit: An annual audit of the company’s financial statements is mandatory.
- Annual General Meeting: Annual general body meeting is to be conducted once a year within 6 months of the end of financial year
- Income tax return filing: Section 8 companies are required to file ITR annually, reporting their income and claiming applicable exemptions or deductions.
- Filing of financial statements: Section 8 companies need to file their financial statements, including the balance sheet and profit and loss (P&L) account, with the ROC (Registrar of Companies) using Form AOC-4.
- Annual Return: An annual return in Form MGT-7 needs to be filed every year, providing information about the company’s directors, shareholders, and other key details.
- Additional compliances: Section 8 companies may have additional compliances to fulfill specific registrations, such as obtaining 12AA registration for tax exemption or 80G registration for tax benefits to donors.
- Renewal of Licenses: If the company has obtained tax exemptions or registrations like 12A or 80G, periodic renewal and compliance are required.
Key Characteristics of a Section 8 Company
- Non-Profit Objective: The core purpose of a Section 8 Company is to undertake charitable and non-profit activities. Revenue earned is used for furthering social causes rather than personal gains.
- Limited Liability: The liability of members is limited, protecting their personal assets from being used to settle company debts.
- No Minimum Capital Requirement: Unlike private limited or public companies, Section 8 Companies do not require a minimum paid-up capital.
- Separate Legal Identity: A Section 8 Company is a distinct legal entity separate from its members, allowing it to own property, enter contracts, and sue or be sued in its own name.
- No Dividend Distribution: Unlike private or public limited companies, the members of a Section 8 Company cannot withdraw profits as dividends.
- Perpetual Succession: The company’s existence is independent of changes in management or membership, ensuring long-term sustainability.
Comparison: Section 8 Company vs. Trust vs. Society
|
Feature |
Section 8 Company |
Trust |
Society |
|
Governing Law |
Companies Act, 2013 |
Indian Trusts Act, 1882 |
Societies Registration Act, 1860 |
|
Objective |
Charitable & Non-Profit |
Charitable |
Social & Cultural Activities |
|
Legal Identity |
Separate Legal Entity |
No Separate Entity |
No Separate Entity |
|
Liability |
Limited Liability |
Unlimited Liability |
Unlimited Liability |
|
Compliance |
High |
Low |
Moderate |
|
Credibility |
High |
Medium |
Medium |
Conclusion
A Section 8 Company is an excellent choice for individuals and organizations looking to contribute to social welfare in a structured and legally recognized manner. With tax exemptions, credibility, and funding opportunities, these companies serve as a robust platform for impactful social change. While the incorporation process and compliance requirements may seem complex, the benefits far outweigh the efforts.
Bibliography
- Section 8, The Companies Act, 2013
- Ramaiya, Guide to the Companies Act (19th ed. 2020)
- T Ramappa, Commentary on the Companies Act, 2013 as Amended by the Companies (Amendment) Act, 2015
- K R Chandratre, Company Secretarial Practice Manual
This article is presented by CA B K Goyal & Co LLP Chartered Accountants, your trusted partner in audit and compliance solutions. For expert assistance, feel free to contact us.
About the Author
This article is written by Advocate Shruti Goyal. Advocate Shruti Goyal has done her LLB from Dr Bhim Rao Ambedkar Law University and a Law graduate currently practicing as an Advocate in High Court and Supreme Court of India.