Section 8 companies, also known as non-profit organizations, are established with the primary objective of promoting charitable, social, scientific, educational, or similar purposes. They operate without the intention of earning profits, and any surplus generated is reinvested back into the company’s objectives. The eligibility criteria for forming a Section 8 company are crucial for individuals, groups, or organizations aiming to make a positive social impact. This guide covers the eligibility requirements, benefits, formation process, and common misconceptions surrounding Section 8 companies in India.
1.What is a Section 8 Company?
Section 8 companies are governed by the Companies Act, 2013 in India. These companies are set up to promote activities that serve the public good, such as arts, commerce, education, charity, environmental protection, sports, research, social welfare, and religion. The most distinctive feature of a Section 8 company is its non-profit nature, which means it cannot distribute dividends to its members.
1.1 Key Features of Section 8 Companies
-Non-Profit Objective: Section 8 companies are prohibited from distributing profits among their members; any profits must be reinvested in furthering the company’s objectives.
-No Minimum Capital Requirement: Unlike other forms of companies, there is no mandatory minimum capital requirement to start a Section 8 company.
-Limited Liability: Members have limited liability, protecting their personal assets in the event of legal claims against the company.
-Separate Legal Entity: Section 8 companies enjoy the status of a separate legal entity, allowing them to enter contracts, own property, and sue or be sued.
2.Who is Eligible to Form a Section 8 Company?
Section 8 companies can be formed by individuals or groups with the intent to promote social causes. Here’s a detailed look at the eligibility criteria:
2.1 Eligibility Criteria for Founders
-Individuals and Legal Entities: Both individuals and legal entities such as associations, trusts, and societies can register as a Section 8 company. The founders can be Indian citizens, foreign nationals, or Non-Resident Indians (NRIs).
-Minimum Number of Members: For a Private Limited Section 8 company, at least two members are required, while a Public Limited Section 8 company requires a minimum of seven members.
-Director Requirements: A Section 8 company must have at least two directors if it’s a private limited company registration and three if it’s a public company. The directors can be individuals or representatives of legal entities. At least one director must be an Indian resident.
-No Age Limit: There is no specific age limit for members or directors, but they must be competent to a contract as per the Indian Contract Act, 1872.
-No Profit Motive: The founders must intend to promote charitable objectives without a profit motive. If any profit is generated, it should be reinvested in the company’s primary objectives.
2.2 Ineligibility Conditions
Certain individuals and entities are prohibited from forming or participating in a Section 8 company:
-Undischarged Insolvents: Persons who have not been discharged from insolvency are not eligible.
-Persons with Criminal Background: Individuals convicted of an offense involving moral turpitude or any offense under the Companies Act, 2013 are barred.
-Banned Entities: Entities banned by any legal or regulatory authority in India or elsewhere cannot form a Section 8 company.
3.Benefits of Forming a Section 8 Company
Choosing a Section 8 company over other forms of non-profit organizations such as trusts or societies offers several benefits:
3.1 Tax Exemptions and Benefits
Section 8 companies can avail themselves of various tax exemptions under the Income Tax Act, such as exemptions under Section 12A (income tax exemption) and Section 80G (donations to the company are eligible for deduction). These exemptions make it easier for the company to attract donations and funding.
3.2 Enhanced Credibility
Section 8 companies are perceived as more credible compared to other non-profit structures due to their stringent compliance requirements and transparency. This credibility helps in attracting funding, partnerships, and support from both domestic and international donors.
3.3 No Minimum Capital Requirement
There is no mandatory minimum capital required for the formation of a Section 8 company. The capital structure can be altered based on the company’s needs and funding availability.
3.4 Limited Liability Protection
Like other companies, Section 8 companies provide limited liability to their members and directors, ensuring that their personal assets are protected against the company’s liabilities.
3.5 Perpetual Existence
Section 8 companies enjoy perpetual succession, meaning the company continues to exist even if its members or directors change, ensuring long-term stability and continuity.
3.6 Ability to Own Property and Enter Contracts
A Section 8 company, being a separate legal entity, can acquire, own, and sell property in its name. It can also contracts, making it easier to operate and manage projects independently.
4.Key Steps to Forming a Section 8 Company
4.1 Obtain Digital Signature Certificate (DSC)
The first step is to obtain a Digital Signature Certificate (DSC) for the proposed directors. The DSC is required for electronically signing forms and documents during the registration process.
4.2 Director Identification Number (DIN)
Each director must have a Director Identification Number (DIN). This number is issued by the Ministry of Corporate Affairs (MCA) and is required for all directors involved in company registration formation.
4.3 Name Approval through SPICe+
The next step is to apply for name approval using the SPICe+ form on the MCA portal. The name must reflect the non-profit nature of the company and should comply with MCA guidelines.
4.4 Drafting of Memorandum of Association (MOA) and Articles of Association (AOA)
The Memorandum of Association (MOA) outlines the company’s objectives, while the Articles of Association (AOA) define the rules and regulations governing the company’s internal management. These documents are crucial for establishing the legal framework of the Section 8 company Registration.
4.5 Filing Form INC-12 for License under Section 8
After drafting the MOA and AOA, file Form INC-12 with the Registrar of Companies (RoC) to apply for a Section 8 license. This license confirms that the company operates as a non-profit and is eligible for associated benefits.
4.6 Certificate of Incorporation
Upon approval, the RoC will issue a Certificate of Incorporation, along with the license to operate as a Section 8 company. This certificate officially recognizes the company as a legal non-profit entity.
5.Compliance Requirements for Section 8 Companies
Even after formation, Section 8 companies must adhere to stringent compliance standards to maintain their status:
5.1 Annual Compliance Filings
Section 8 companies must file annual returns and financial statements with the MCA, like other companies. This includes:
-Form AOC-4: For filing the financial statements, including the balance sheet and profit and loss account.
-Form MGT-7: For filing the company’s annual return.
5.2 Statutory Audit
Section 8 companies are required to conduct a statutory audit of their financial statements, irrespective of their turnover. The audit ensures that the company’s finances are accurately represented and comply with legal requirements.
5.3 Income Tax Returns and Tax Audits
Filing annual income tax returns is mandatory, even if the company is tax-exempt. Companies with gross receipts exceeding ₹1 crore must also conduct a tax audit.
5.4 CSR (Corporate Social Responsibility) Reporting
While Section 8 companies are primarily non-profits, those with substantial income or involvement in CSR activities must report their contributions and projects in compliance with CSR guidelines.
6.Common Misconceptions About Section 8 Companies
6.1 Misconception: Section 8 Companies Can Distribute Profits
Section 8 companies are prohibited from distributing profits to their members. All earnings must be reinvested in the company’s objectives. Any violation of this principle can lead to the cancellation of the company’s license.
6.2 Misconception: Only Large Organizations Can Form Section 8 Companies
Section 8 companies can be formed by individuals, small groups, or large organizations. The flexibility in capital requirements and the legal framework makes it accessible to a wide range of founders, regardless of size.
6.3 Misconception: Section 8 Companies Are Exempt from All Taxes
While Section 8 companies can apply for various tax exemptions, they are not automatically exempt from all taxes. Compliance with income tax filings, GST, and other financial regulations is still required.
7.Advantages of Choosing a Section 8 Company Over Trusts and Societies
7.1 Better Governance and Compliance Standards
Section 8 companies are governed by the Companies Act, 2013, which imposes stringent compliance standards, ensuring greater transparency and accountability compared to trusts and societies.
7.2 Easier Access to Funding and Grants
Due to their regulated structure, Section 8 companies often have an easier time accessing grants, donations, and funding from national and international bodies. Their structured governance provides assurance to donors that funds are managed appropriately.
7.3 Flexibility in Management and Operations
Unlike trusts, where the management is rigid, Section 8 companies allow for more flexible and dynamic management, which can adapt as the organization grows and evolves.
Conclusion
Forming a Section 8 company is an excellent option for individuals and groups dedicated to promoting charitable, social, educational, or similar non-profit objectives. The eligibility criteria are accessible, making it a viable choice for those looking to formalize their efforts to make a positive impact. While the compliance requirements may seem rigorous, they enhance the credibility and trustworthiness of the organization, ultimately aiding in achieving its goals. These criteria and company registration process ensure that you set up your Section 8 company on the right path toward sustainable social impact.
