Section 8 company registration guide

Section 8 Company Registration Guide

Section 8 Company (NGO) Guide

What is a Section 8 Company?

In India, a Section 8 Company is governed by the Indian Companies Act (2013) (and its changes), as well as by the rules and regulations which it contains. It is administered by the Ministry of Corporate Affairs of India through the Registrar of Companies (RoC) present in each state of India. The rules, requirements, processes, and procedures for creating Companies vary to some extent and depend on the type of Company that will be created.

Section 8 Company is a Company registered under Section 8 of the Companies Act of 2013, formerly known as the section 25 Company under the Companies Act of 1956. Its primary objective: to promote research, charity, trade, arts, science, sports, education, and the environment or any other similar subject, provided that the benefits if any, or other income, are used only for the objectives of the assets of the Company. No dividends will be paid to its members.

Requirements For Incorporation Of Section 8 Company

The minimum requirements for Section 8 Company Registration are:-

  • There must be at least two shareholders.
  • There must be at least two directors (the directors and the shareholders can be the same person).
  • At least one of the directors must be based in India
  • There is no need for minimum capital.
  • The income tax PAN is mandatory for Indian citizens.
  • As proof of identity Voter ID card /driver’s license/passport is required. However, the passport is a mandatory requirement for the proof of the identity of foreigners.
  • Proof of residency (utility bill/phone bill / mobile phone bill/bank account statement);
  • Proof of the registered office address (this is the rental contract with the last rental receipt and a copy of the latest electricity bill in the name of the owner of the building and a NOC from the owner of the building)
  • If the premises are owned by the director or promoters, all documents that indicate the owner, such as the receipt of housing tax or sale/ownership deed, etc., as well as no objection certificate.

Differences between Trust, Society and Section 8 Company

What are the various differences between Trust, Society and Section 8?

1. Let us look at the definitions first

Trust:

Trust is for the good of the public. A Trust may have different interests, such as education, animal welfare, religious activities or even recreational activities. However, it can only be set up in matters of property and real estates, such as schools or hospitals with building or grounds.

Society:

A Society is a type of organization that has been registered under the Indian Society Act of 1860. It has an appropriate governing body as well as a managing board that carries out administration and applies its principles. They work together and share their responsibilities for their objective.

Section 8 Organizations:

An entity within the meaning of Section 8 has limited liability and is often constituted to promote commerce, art or religion. The primary requirement of the organizations in Section 8 is that the benefits and profits obtained by these organizations cannot be shared among the members and can only be used to promote the objective for which they were formed.

2. Applicability of law and jurisdiction

In India, a Trust is governed by the Registrar of Trusts. But a Society is governed by the Registrar of Societies, while in Section 8 the Companies are supervised by the Registrar of Companies and the representative of the state in which they are established.

3. Necessary documents

To register a Trust, a deed of trust is required. A Society needs a Memorandum of Association, as well as a charter of rules and regulations. A Company formed under Section 8 requires a Memorandum of Association as well as Articles of Association and many other documents.

4. Minimum number of members

A Trust must have a minimum of two trustees, while a Society requires seven (in the case of a State Society) and eight (in the case of a national Society). A company registered through Article 8 needs at least two members if it is privately held and seven members if it is public limited.

5. Management differences

Trusts are usually looked after by the trustees. The operation of the Society is managed by a committee or by the managing board. A Section 8 Company is governed by a board of directors.

6. The time required for registration

The registration of a Trust may require up to 20 days, the registration of a Society up to 45 days and the registration of a Company under Section 8 up to 20-40 days.

Difference between NGO and NPO

How to tell the difference between NGO and NPO and their objectives and principles?

To begin with, an NGO represents a non-governmental organization. A non-profit organization can be abbreviated as NPO.

By definition, non-governmental organizations are organizations that are supposed to work on public and social projects related to welfare. The reason why the “non-governmental organization” is presented is that, in a sense, these organizations should expand the scope of the government and carry out work that the government currently cannot do. Governments depend heavily on NGOs for their daily work and delivering benefits to ordinary people. They come in different forms and shapes and can be created by any member of the public.

Nonprofit organizations, on the other hand, have a very vague definition. It is practically any private or public body from which the owners cannot under any circumstances obtain profits/dividends. Non-profit organizations can generate excess profits and income, but funds must remain within the organization and be used for the purposes of the organization. They can hire excellent talent by paying an exorbitant salary, generate millions of dollars in income and yet continue to be a non-profit. Many trade unions and industrial bodies or guilds are non-profit.

Due to the nature of the definition, non-profit organizations are very popular in business and commerce. They are an effective way to reach a goal. The goal could be the attainment of social objectives. They have more an approach that is very business-like.

Non-governmental organizations, on the other hand, have a more social welfare based approach and are generally made up of people interested in a particular social cause or the welfare of a specific group of people. Non-governmental organizations also tend to participate more directly in social problems such as slavery or child labor. The prevailing opinion is that non-governmental organizations offer more support in the field through practical work, while non-profit organizations try and promote well-being through financial aid.

In a sense, both might work identical fashion, but the objectives and the meaning behind the organizations are different. It is usually thought that the audit requirements for NGOs would also be much stricter. In the case of most countries, non-profit organizations have much more legal flexibility than NGOs. Non-profits may be thought of as a business with a particular clause of no distribution of profit. NGOs have the ability to work in much more specific and vital spheres.

Procedure for the formation of a Section 8 Company

In India, an NGO may be registered as a Section 8 Company under the Companies Act 2013. One of the entities mentioned in Section 8 (formerly, Companies established under section 25 of the 1956 Act) is a legal entity for non-governmental or non-profit organizations. Section 8 registration process is lengthy compared to a Trust or Society.

Types of Section 8 capital formation –

  • Limited liability Company based on shares: Like a regular Company a Section 8 Company can also register by an issue of share capital among its members.
  • Limited liability Company without a share capital: In this case, the Company can register by the provision of a guaranteed amount present in its memorandum. Since these types of Companies do not have any kind of share capital, the promoters and members of the Company will also have one vote during meetings.

Here are the steps to follow to create a Section 8 Company in India –

  • The requirement of a digital signature

The digital signature is required to sign the incorporation letter request and other necessary forms for the regular compliance requirements. It is issued by the proper certification authority. The following is a list of the documents needed to obtain the digital signatures of the directors.

For Indian nationals –

  • Copy of the PAN card
  • Copy of ID proof such as Voter Id Card, driver’s license and passport.
  • A completed application form

For foreign nationals –

  • A copy of passport
  • A completed application form
  • Name approval process

The application must be filed with the Registrar of Companies in the RUN application. For the approval of the name, the applicant can specify only two names. The approved name is valid for only 20 days.

  • Name of a Section 8 Company

It should be noted that the name of the Company in Section 8 must end with words like Foundation, Institution or Association. Although this is a limited liability Company form, the term-limited liability Company is not part of the name in a Company formed through Section 8.

  • The creation of MoA and AoA

Suitable Memorandum of Association and Articles of Association have to be drafted and filed using in Form INC–13

  • License application

It has to be prepared in INC-12 for necessary licenses to operate the Company. There is a need to pay statutory fees and attach the necessary documents.

  • Registration application

Once the license is granted by the RoC then the next and last step is to file the form for getting the certificate of incorporation for which the form SPICE 32 is required to be filed to the RoC.

  • Receiving Certificate of Incorporation  

If the RoC is satisfied after due scrutiny of various information provided through different forms and applications, it issues a Certificate of Incorporation. It allows the creation of a legal entity and its ongoing operation under Section 8.

  • Revocation of Incorporation

The Central Government may revoke the license of the Company if it does not comply with any of the requirements of this section or the conditions or activities of the Company which are carried out is held to be fraudulent or contrary to the public interest. This takes place under Rule 8(6) the Companies (Incorporation) Rules, 2014 which allows the government such powers.

However at any time, the company can convert its state into a Public Limited Company or Private Limited Company and change its corporate name by adding the words “Limited” or “Private Limited,” and the Registrar shall amend its records related to the Company accordingly. The central government may require that the Company be dissolved or merged with another Company which is also incorporated in this section. However, these orders can only be placed after the Company has received a reasonable opportunity to be heard.

Documents required for Section 8 Company Registration

  • Passport size photos of directors
  • Address proof of directors
  • Photo ID proof of directors
  • Digital signature
  • Self-declaration about directorship in other Companies from directors
  • Rent agreement or sale deed of the registered office
  • No objection certificate from the owner of premises used as the registered office

Penalty payable by a Section 8 Company

If a Company violates the clause established in Section 8 then under subsection 11 of Section 8 of the Companies Act, the Company is subject to the penalty due to fraudulent behavior.

  • There can be fine, not less than INR 10 lakhs and extending up to INR 1 crore, and
  •  Every official and director who is in default can be fined to the tune of INR 25,000 and extending to INR 25 lakhs or imprisonment for a term which may extend to three years or both may be applied.

Specific exemptions for Section 8 Companies

  • No need for a Company Secretary – Section 8 Companies are not required to appoint a corporate secretary. This relaxation leads to lower costs for Section 8 Companies, but it also leads to a less work opportunity for Company Secretaries.
  • No minimum paid-up capital – Same as private Companies, Section 8 Companies no longer need any minimum paid up capital.
  • Relaxed notice period – Under new rules, an AGM or Annual General meeting can be called with 14 days notice. This is reduced from the previous 21 clear days requirement.
  • No need for minutes – There has to be no statutory requirement for recording proceedings of records of a meeting or minutes maintained.
  • Meeting required – The company has to hold at least one board meeting within every six calendar month instead of four board meeting in a calendar year.
  • Tax-exempt status – A Section 8 Company can be fully exempted from paying income tax. To this end, an application has to be made to the local income tax commissioner with supporting details for tax-exempt status.

Donations made to a Section 8 Company

Those who donate to a Company incorporated under Section 8 receive certain benefits under Section 80G of the Income Tax Act 1961.

How to raise donation in Section 8?

There are various avenues by which a section 8 Company can raise donations.

  • They can apply for government grants and aids.
  • They are able to raise donations from individuals through a campaign. The campaign may be carried out by word of mouth or through advertising on tv, newspaper or via social media.
  • Make presentations to high net worth individuals to help their cause. They also petition companies to support them through their corporate social responsibility
  • Some Section 8 Companies even make a door to door campaign to raise funds

The salary structure of a Section 8 Company

A Section 8 Company can like any other Company pay sitting fees to its directors up to INR 1 lakh per meeting. The Company has no restrictions on the payment of salary to its officers. It is run in the same way as other Companies and is entirely free to hire management and personnel by paying them suitable remuneration. The employees of a Section 8 Company are entitled to Employee Provident Fund as in other Companies. The salary structure in Section 8 Company is created with exactly the same goals in mind as in a private or public Company.

Conclusion 

The main reason for the existence of Section 8 Companies is to give legitimacy to NPOs and NGOs and allow them to operate under a more flexible framework which is quite impossible in case of a Trust or Society.

A Section 8 Company can perform any act as long as it does so without any profit motive. There can be no diversion of funds for use by owners and promoters other than that paid to them as sitting fees or as employees if they act as officers of the Company. It is much harder to set up than a Trust or Society and has to hold at least two board meetings every year. Like all Companies, it also needs to get its accounts audited every financial year.

Popular examples of Section 8 Companies include Infosys Foundation and Tata Foundation as well as Federation of Indian Chambers of Commerce and Industry (FICCI). Such organizations are also restricted from accepting foreign finances. Being an artificial legal entity in the same way as other Companies it is free to raise debt from lenders but is more trustworthy than a Society because it is regularly audited. It may be thought of as a private limited Company that is working towards making social problems disappear by bringing inefficient management techniques.

By making NPOs and NGOs part of the corporate landscape Section 8 Companies have created a transparent system that allows private participation in social welfare objectives with considerable ease.

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