formation of section 8 Archives

Introduction:

Every company has some objectives. Some companies have objectives of making profits by carrying out trade and commerce while some companies primarily have charitable and non-profit objectives. Generally companies having non-profit objectives prefer to form Section 8 companies instead of regular NGOs and associations or Societies or Trusts. This is because Section 8 Company has limited liability, so their personal assets will not be used in paying debts of the company. Here are some advantages that these companies enjoy. These companies are referred to as a “Section 8 Company” because they get recognition under Section 8 of Companies Act, 2013.

Definition of Section 8 Company:

The Companies Act defines “Section 8 company” as one whose objectives is to promote fields of arts, commerce, science, research, education, sports, charity, social welfare, religion, environment protection, or other similar objectives. These companies also apply their profits towards the furtherance of their cause and do not pay any dividend to their members.

These companies were previously defined under Section 25 of Companies Act, 1956 with more or less the same provisions. The new Act has, however, prescribed more objectives that Section 8 companies can have. Famous examples of Section 8 companies include Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industries (CII). The objective of these companies is facilitating the growth of trade and commerce and India.

Eligibility for forming Section 8 Company:

A person or an association of persons intending to be registered under Section 8 of the Companies Act, 2013 as a limited company –

has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
intends to apply its profits, if any, or other income in promoting its objects; and
intends to prohibit the payment of any dividend to its members.

Formation of Section 8 Company:

A person or an association of persons can make an application to the Registrar of Companies using requisite forms to form a company with charitable objectives under Section 8 of Companies Act.

The Central Government, if satisfied, can accept such an application upon any terms and conditions imposed under the license granted by it. Once accepted, the Registrar of Companies will register the company after the applicants pay all requisite fees.

It is important to note that such companies can only be limited companies. All privileges and obligations of limited companies apply in this case. Further, these companies also do not need to include the words “Limited” or “Private Limited” in their names, as all other companies have to.

Since the existence of such companies is based on the license granted to them, they cannot even alter their memorandum or articles of association without the Central Government’s permission. They also cannot do anything that the license disallows.

Cancellation of License [Section 8(6)]:

Section 8 companies require a grant of a license by the Central Government. All such licenses are revocable as well on the following grounds:

the company contravenes provisions of Section 8;
terms of the license are violated;
when its conduct is fraudulent, or it violates its own objectives and public policy.

The Government can even order the company to be wound-up or amalgamated with another similar company under certain circumstances. The Government has to hear the company before passing such orders.

Winding Up [Section 8 (9)]:

Section 8 companies can wind-up or dissolve themselves either voluntarily or under orders given by the Central Government. If any assets remain after satisfaction of debts and liabilities upon such winding-up, the National Company Law Tribunal can order the transfer of these assets to a similar company. It can also order that they must be sold and the proceeds of this sale should be credited to the Insolvency and Bankruptcy Fund.

Punishment for Contravention [Section 8 (11)]:

Any company that contravenes provisions of Section 8 is punishable with a fine ranging from Rs. 10 lakhs to Rs. 1 crore and directors and every officer of the company who are in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than twenty-five thousand rupees but which may extend to twenty-five rupees, or with both. Such officers can also face prosecution under stringent provisions of Section 447 (dealing with fraud) if proved that the any affairs of the company were conducted fraudulently.

Advantages of Section 8 Company

A section 8 company yields an array of benefits, unlike a Society or Trust. Following is the list of advantages for companies registered under Section 8:

Tax benefits: Since Section 8 companies are a non-profit organization, so they leverage the exemption from the provision of income tax. The companies also get various other tax benefits and deductions. They employ many perks under section 80G of the Income Tax Act.

Zero Stamp Duty: Section 8 companies do not require to pay stamp duty on the Memorandum of Association and Article of Association, unlike a private or public limited company.

Minimal share capital: Unlike the other limited companies like public, private, or one person, Section 8 companies do not need much share capital to set up the entity. The members can directly use the funds from their subscriptions or donations.

Exempted from any name: In opposes to other companies who are under obligation to use their company’s name as ‘limited company’, section 8 companies get exempted from the use of any title. Thus, they can perform their functions without updating the public about their limited liability status.

Separate legal entity: Section 8 company has a distinct legal entity which means the company’s existence is different from its members. The company has a perpetual existence along with greater flexibility.

Disadvantages of Section 8 Company

Following are the drawbacks that every company registered under Section 8 has to bear:

No distribution of profits: 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, which revolves around the advancement of art, science, commerce, sports, environmental protection and fields of such sort.

Amendment in MOA and AOA: Such an entity cannot amend or alter the Memorandum of Association or the Articles of Association without having the approval of the Central Government beforehand.

Zero benefits: The members of a Section 8 company gets 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.

Limited objective: The central objective of Section 8 companies is to use the income and profits of the company in promoting some particular fields only and not for any other purpose.

Multiple rules and regulations: The Central Government imposes much compliance on Section 8 companies. All the rules and regulations must include in the Memorandum of Association and Articles of Association.

Conclusion:

India still lacks behind in many areas in regard to education, healthcare, sports training etc. These aspects are provided by many nonprofit organizations. These NPO’s are the driving force behind the development of the society. The companies incorporated under Section 8 of the Companies Act, 2013 go a long way betterment of the society.

To motivate more people to help society, and award those who already do so, Incorporation of a company under Section 8 is a very convenient process. It does not take too much time and comes with a lot of advantages, and relaxed norms. All you need to ensure is that you fill the correct forms and carry the right documents you can get a Section 8 company incorporated easily. But above all you need to run it as per law, failing which consequences can be very high.

CHARITABLE COMPANY/SECTION 8 COMPANY