NOTE ON SECTION-8 COMPANY

In India, there are mainly the following types of non-profit organizations

• Societies registered under the Societies Registration Act 1860;
• Trusts formed under the Indian Trust Act 1882;
• Section-8 Companies, an entity registered under Section-8 of the Companies Act, 2013.

Any person or persons willing to promote commerce, art, science, sports, education, social welfare, etc, can incorporate a Section-8 Company. There is no restriction for a Section-8 Company to earn profit in carrying on its objectives. Still, it cannot distribute the same to its shareholders, and the profits have to be re-deployed in furthering its objectives.

Section 8 company is a preferred vehicle for achieving CSR objectives. The Companies (Corporate Social Responsibility Policy) Rules, 2014 (the Rules) provide inter alia Section 8 companies with an established track record of three years.

Section 8 Companies are more reliable than all other forms of charitable organizations. They are governed by the Companies Act and are regulated strictly. Such as the requirement of a mandatory annual audit, and both the “MOA and AOA” cannot be altered at any stage or situation. The rules on managing the profits and losses of the Company make these companies trustworthy.

Those donating to a Section 8 Company are eligible for tax exemptions u/s 12A and 80G of the Income Tax Act.

Separate Legal Entity

Unlike a Trust or a Society, a Section 8 company is a legal entity or a body corporate with a distinct existence apart from its directors and shareholders recognized under the law. Section 8 company provides many advantages in promoting its objects, and it can own properties and incur debts in its own name. More importantly, the ownership in the Company can be transferred by a transfer of shares, and corporate restructuring schemes can be executed for the merger, demerger, acquisition, etc., subject to the terms specified in the Act.

Limited Liability

Due to the limited liability status, the members of such a company have no liability towards the Company’s debts because the Company and members are considered separate persons in the eyes of the law. The Company is recognized as an artificial juridical person. At best, the members’ liability can only extend to any unpaid value of the shares they have taken.

Tax

Section 8 company can get registered under sections 80G and 12A of the Income Tax Act, 1961. Thus, a Section 8 company is eligible to receive donations similar to a Trust and apply the same in furtherance of its objects.

Compliance

• Upon Incorporation, a Section 8 company must hold its first board meeting within six months of Incorporation.
• Minimum 2 directors and shareholders are required to incorporate a company. All the Directors must have their valid DIN (Director’s Identification Number) & DSC (Digital Signature Certificate). At least one director must be a resident of India, i.e., have stayed in India for a total period of not less than 182 days in the previous calendar year.
• Auditor has to be appointed within 30 days from the date of Incorporation. There must be Annual filing of accounts, statements, and returns of the Company with the ROC to adhere to the set compliances.

Registration Process

• DSC & DIN-Applications will be filed with the ROC to obtain DIN and DSC for the Directors, duly signed. We need to apply for DSC first. Once received, Form DIR-3 is to be filed with the ROC to get the “DIN”.
• Name Approval- You suggest your preferences, and we’ll conduct a coherent “Company Name Search”. After choosing a name among the three options, we’ll apply for a unique name for your Company. Name availability must be checked in the “Reserve Unique Name” or RUN facility. A maximum of 2 names is to be proposed, initially.
• Incorporation and License Application- We will apply for the Section 8 License with the Central Govt. The suitable format to use is Form INC-12. It is to be sent with the “MoA” in Form INC-13. “AoA”, Declaration by CA/CS/CWA in Form INC-14, Declaration by Directors or Applicant in Form INC-15, Name Approval Letter, and a 3-year estimate of future income & expenses. And also apply for the COI. The “COI” or Certificate of Incorporation is proof that the Company has been created. The unique CIN (Company Identification number) is also mentioned in this.
• Section 8 Company is now operative- As soon as all the processes have been completed and your Section 8 Company has been registered, we’ll apply for your PAN and TAN.
• Tax Registration- Once PAN is received, will apply for GST, 12A & 80G.

Documents Required

1. For Directors/Shareholders- Soft copy of PAN Card, Aadhaar Card, Address Proof (Bank Statement, Electricity Bill, Telephone Bill not older than two months), 2 Passport Sized Photographs.
2. For Registered Office- Ownership Proof, Utility Bill (Electricity Bill, Gas Bill not older than two months), NOC (from the owners).
3. 3-year estimate of future income & expenses.

Remuneration to Director/Employee

There is no restriction in the payment of remuneration to an employee/director.  If the employee is also a member, no remuneration or other benefit in money or money’s worth can be given to him except payment of out-of-pocket expenses, reasonable and proper interest on money lent, or reasonable and appropriate rent on premises let to the Company.

However, Company may in good faith pay prudent remuneration to any of its members in return for any services (not being services of a kind which are required to be rendered by a member), actually rendered to the Company.

Disadvantage

• 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. The members of a Section 8 company get 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.
• Section-8 Company cannot amend or alter the Memorandum of Association or the Articles of Association without having the approval of the Central Government beforehand.

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