There are various types of companies included in the Company’s Act, 2013, including public companies, private companies, and one-person companies. In most cases, a company is established to run a business and reap profits, but there are exceptions. Entrepreneurs most often become involved in philanthropy by establishing organizations that promote social welfare. It is their intention to make a difference in the lives of the people by establishing such organizations.
They exist solely to help society without focusing on monetary gain. Non-profit organizations (NPOs) fall under Section 8 of the Companies Act, 2013. Besides charities, Section 8 also includes organizations that advance the arts, science, research, commerce, sports, religion, and environmental welfare.
Since these companies are non-profits, their members do not receive dividends or paybacks. In addition, the income or funds generated by the company shall be used to carry out its activities and promote its primary objectives. Unlike Trusts and Societies, Section 8 companies are licensed by the Central Government through the Ministry of Corporate Affairs (MCA), while the latter are licensed by their respective state governments.
Section 8 companies have the following advantages:
- Being non-profit organizations, Section 8 companies are exempt from income taxes because they are non-profits. By virtue of Section 80G of the Income Tax Act, 1961, the companies also enjoy several other tax benefits. Individuals and corporations can claim tax exemptions for donations made to Section 8 companies.
To avail of the exemptions and deductions under this Section, charity organizations must also register under Sections 12A and 80G of the Income Tax Act, 1961. According to Section 135 of the Companies Act, 2013, other public and private limited companies can also make donations to Section 8 companies as part of their Corporate Social Responsibility (CSR).
- Sec 8 companies are exempt from paying stamp duty during registration, unlike public and private limited companies.
- In contrast to Limited Liability Partnerships, Section 8 companies are allowed to transfer title and ownership of both movable and immovable properties without any restrictions.
- Due to their purpose of carrying out charitable acts or conducting research, Section 8 companies are not required to hold a minimum share capital, unlike public limited companies. Capital can be raised according to the company’s needs.
- Section 8 companies also possess a separate legal identity and are considered unique corporate structures under the Companies Act, 2013.
- Being a separate legal entity, a Section 8 company can own or alienate tangible or intangible property independently. A property could be residential or non-residential, such as a training center, research institute, school, gallery, etc. Members and shareholders cannot claim the property as their own.
- As with private limited companies, these companies also exhibit perpetual succession until they are legally dissolved. It exists forever, regardless of the death or termination of its members.
- Because Sec 8 companies are licensed by the Central Government, they are more credible than Trusts or Societies. Despite being non-profit organizations, these companies are prohibited from altering their Memorandum of Associations (MoAs) and Articles of Associations (AoAs). They hold a reliable reputation because of these stringent measures.
- Members of a Section 8 company have limited liability, so if the company incurs debts or has discrepancies, their personal assets are not in jeopardy. Indemnifying creditors for the company’s debts is not the responsibility of the shareholders.
- Aside from individuals, firms and corporations can also become members of a company.
- Companies under the Companies Act are required to have titles such as ‘private limited company,’ ‘public limited company,’ etc. A Section 8 company, on the other hand, does not have such a restriction. Companies under Section 8 are not required to inform the public of their liability status.
Companies under Section 8 must comply with the following requirements:
Even though Section 8 companies were formed with a benevolent purpose and do not serve to accrue monetary benefits, they must adhere to mandatory compliances stipulated by the Companies Act, 2013 and the Income Tax Act, 1961. Penalties of up to Rs100,000 per year can be imposed on companies if they do not comply with the rules.
- A Section 8 company must appoint its auditor within 30 days of incorporation. Financial statements and annual financial reports should be filed by the auditor
- Section 8 companies must hold their first Board Meeting within 30 days of incorporation. In this way, the Board meets every six months during the respective calendar year.
- Section 8 companies must hold their first annual general meeting (AGM) within nine months of the end of their financial year.
The strict compliance with the stated provisions is vital for the uninterrupted operation of Section 8 companies. A company can assess its financial stability by submitting its annual returns and statements on time. Regular filing would also enhance the company’s chances of obtaining financial aid. In turn, this would enhance the company’s credibility and leverage its market value.
Some inherent disadvantages of these companies include their limited scope and objectives. Additionally, the members of the company receive little from the company other than reimbursement for expenses incurred during the operation of the business. In spite of this, it’s undeniable that these companies have more advantages than disadvantages. Since these companies are developed with the sole purpose of benefiting the public, their demerits don’t really matter when viewed in a broader context.
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