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WHAT IS SECTION 8 COMPANY?

WHAT IS SECTION 8 COMPANY?

Introduction

WHAT IS SECTION 8 COMPANY?

A Section 8 company, also known as a Section 8 company under the Companies Act, 2013 (formerly under the Companies Act, 1956), is a unique legal entity in India designed primarily for promoting charitable, social, or non-profit objectives. These entities are distinct from typical for-profit companies, and they have specific regulations and features tailored to their altruistic purposes.

In this comprehensive guide, we will explore Section 8 companies in India in detail, covering their origins, characteristics, registration process, advantages, disadvantages, and their critical role in advancing philanthropic and social causes. Visitofficialwebsite 

HISTORICAL PERSPECTIVE OF SECTION 8 COMPANY

To understand Section 8 companies fully, it’s essential to delve into their historical context. The concept of companies with charitable and non-profit objectives dates back to the early 20th century in India. Initially known as “Section 25 companies” under the Companies Act, 1956 (and later as “Section 8 companies” under the Companies Act, 2013), they were established to provide legal recognition and structure for organizations dedicated to charitable and non-profit endeavors.

The key motivation behind creating such entities was to encourage individuals and organizations to work collectively for the greater good of society. These organizations could engage in various activities related to education, healthcare, poverty alleviation, environmental conservation, and more without the primary aim of making a profit. Over time, Section 8 companies have played a significant role in addressing social issues, contributing to education, healthcare, and various charitable activities.

DEFINING CHARACTERSTICS OF SECTION 8 COMPANY

Section 8 companies have several defining characteristics that set them apart from for-profit companies and other non-profit entities like trusts and societies. Let’s delve into these characteristics to gain a better understanding:

  1. Non-profit Objective: The most fundamental characteristic of a Section 8 company is its non-profit motive. These organizations are established with the primary aim of promoting activities that benefit society and are not driven by profit-making.

  2. Name: The name of a Section 8 company must include the words “Section 8” or “Limited” at the end, as mandated by the Companies Act.

  3. Limited Liability: Just like other companies, members and directors of a Section 8 company enjoy limited liability, which means their personal assets are generally shielded from the company’s financial obligations.

  4. No Profit Distribution: Section 8 companies cannot distribute their profits to members. Any income generated must be reinvested in furthering the company’s charitable objectives.

  5. License Requirement: These companies need to obtain a license from the Central Government, specifically the Registrar of Companies (RoC), which is responsible for approving the registration of Section 8 companies.

  6. Compliance: Section 8 companies must comply with various regulatory requirements, such as maintaining proper accounts, conducting annual general meetings, filing annual returns, and adhering to the provisions of the Companies Act.

  7. Central Government Approval: The application for registration, including the license application, must be submitted to the Central Government, which is responsible for approving and overseeing Section 8 companies.

  8. Perpetual Succession: A Section 8 company has perpetual succession, meaning it continues to exist even if there are changes in its membership or leadership.

  9. Transferability: Transferring ownership or management within a Section 8 company is generally more straightforward compared to other non-profit entities like trusts or societies.

THE REGISTRATION PROCESS OF SECTION 8 COMPANY

Step 1: Obtain Digital Signature Certificates (DSC)

  • Before initiating the registration process, it’s essential to obtain Digital Signature Certificates (DSCs) for the proposed directors and subscribers of the Section 8 company. DSCs are necessary for online filing and signing of documents.
 

Step 2: Obtain Director Identification Number (DIN)

  • The directors of the proposed company need to apply for Director Identification Numbers (DIN). This is done by filing Form DIR-3 online with the Ministry of Corporate Affairs.
 

Step 3: Name Approval

  • Apply for name approval for the Section 8 company by submitting Form INC-1. The proposed name should comply with naming guidelines. Once approved, the name is reserved for 20 days.
 

Step 4: Draft Memorandum and Articles of Association

  • Draft the Memorandum of Association and Articles of Association for the Section 8 company. These documents should clearly state the objectives of the company and include other necessary clauses as per the Companies Act.
 

Step 5: Application to Central Government

  • Prepare and file Form INC-12 (Application for a license under Section 8) with the Registrar of Companies (RoC) to obtain a license for the Section 8 company. This form should be accompanied by various documents, including the Memorandum and Articles of Association, a declaration confirming compliance with Section 8 requirements, a statement of assets and liabilities, and a statement of estimated future annual income and expenditure.
 

Step 6: RoC Incorporation Process

  • Once the Central Government approves the license application, the RoC will issue a license. After obtaining the license, apply for incorporation by filing Form INC-7 (for incorporation) and Form INC-22 (for address proof) with the RoC. These forms should be filed within 60 days from the date of obtaining the license.
 

Step 7: Certificate of Incorporation

  • If the Registrar is satisfied with the documentation and information provided, they will issue a Certificate of Incorporation. This certificate signifies the official registration of the Section 8 company. 
 
  • Step 1: Obtain Digital Signature Certificates (DSC)

    • Before initiating the registration process, it’s essential to obtain Digital Signature Certificates (DSCs) for the proposed directors and subscribers of the Section 8 company. DSCs are necessary for online filing and signing of documents.
     

    Step 2: Obtain Director Identification Number (DIN)

    • The directors of the proposed company need to apply for Director Identification Numbers (DIN). This is done by filing Form DIR-3 online with the Ministry of Corporate Affairs.
     

    Step 3: Name Approval

    • Apply for name approval for the Section 8 company by submitting Form INC-1. The proposed name should comply with naming guidelines. Once approved, the name is reserved for 20 days.
     

    Step 4: Draft Memorandum and Articles of Association

    • Draft the Memorandum of Association and Articles of Association for the Section 8 company. These documents should clearly state the objectives of the company and include other necessary clauses as per the Companies Act.
     

    Step 5: Application to Central Government

    • Prepare and file Form INC-12 (Application for a license under Section 8) with the Registrar of Companies (RoC) to obtain a license for the Section 8 company. This form should be accompanied by various documents, including the Memorandum and Articles of Association, a declaration confirming compliance with Section 8 requirements, a statement of assets and liabilities, and a statement of estimated future annual income and expenditure.
     

    Step 6: RoC Incorporation Process

    • Once the Central Government approves the license application, the RoC will issue a license. After obtaining the license, apply for incorporation by filing Form INC-7 (for incorporation) and Form INC-22 (for address proof) with the RoC. These forms should be filed within 60 days from the date of obtaining the license.
     

    Step 7: Certificate of Incorporation

    • If the Registrar is satisfied with the documentation and information provided, they will issue a Certificate of Incorporation. This certificate signifies the official registration of the Section 8 company

Is Section 8 company taxable

Yes, Section 8 companies in India are subject to taxation. While Section 8 companies are formed for charitable and non-profit purposes, they are not automatically exempt from taxation. The tax implications for Section 8 companies are governed by the provisions of the Income Tax Act, 1961.

Key points regarding the taxation of Section 8 companies include:

  1. Income Tax Exemptions: Section 8 companies may be eligible for exemptions under Section 11 of the Income Tax Act. This section provides exemptions for income derived from property held for charitable or religious purposes, or income applied for charitable or religious purposes in India.

  2. Approval for Exemption: To avail of the income tax exemptions, Section 8 companies need to obtain approval from the Income Tax Department. The company must apply for and receive recognition under Section 12AA, which grants it the status of a charitable institution.

  3. Tax on Business Income: If a Section 8 company engages in commercial activities or business ventures, the income generated from such activities may be subject to regular income tax rates. However, income applied for charitable purposes may still be eligible for exemptions.

  4. Compliance Requirements: Section 8 companies are required to comply with the statutory reporting and filing requirements as per the Income Tax Act to maintain their tax-exempt status.

It’s crucial for Section 8 companies to adhere to the relevant tax regulations and seek professional advice to ensure proper compliance. The tax treatment may vary based on the specific activities and income sources of the Section 8 company. It’s also important to note that tax laws and regulations are subject to change, so organizations should stay updated with the latest amendments.

What is an example of a Section 8 company

A Section 8 company is a type of non-profit organization in India, registered under Section 8 of the Companies Act, 2013. Here are some key points about Section 8 companies, along with an example:

  1. Non-Profit Nature: Section 8 companies are established for promoting charitable, cultural, social, educational, or environmental objectives. They operate for the benefit of the public and are not intended to generate profits for their members.

  2. No Dividend Distribution: Unlike other companies, Section 8 companies cannot distribute dividends among their members. Any income generated must be utilized for furthering the company’s objectives.

  3. Registration Process: To register as a Section 8 company, organizations need to apply for a license from the Registrar of Companies (RoC). The registration process involves meeting certain criteria and submitting the necessary documents.

  4. Name of the Company: The name of a Section 8 company usually ends with words like Foundation, Association, Society, Council, Club, Charities, Institute, Academy, Organization, or Federation.

  5. Example – Akshaya Patra Foundation: One well-known example of a Section 8 company is the Akshaya Patra Foundation. It is a non-profit organization that focuses on providing mid-day meals to school children to encourage education and alleviate hunger. The foundation operates as a Section 8 company and relies on donations and support to carry out its mission.

  6. Tax Benefits: Section 8 companies enjoy certain tax benefits, and donors contributing to them may avail tax exemptions under the Income Tax Act.

It’s important to note that the information provided here is based on the status as of my last knowledge update in January 2022, and there may have been developments or changes since then.

WHAT IS SECTION 8 COMPANY?

Who is eligible for Section 8 company

In India, eligibility for establishing a Section 8 company is determined based on the objectives and activities the organization intends to pursue. Section 8 companies are formed under Section 8 of the Companies Act, 2013, and they must be formed for promoting charitable, educational, scientific, religious, cultural, or social welfare objectives. Here are some key points regarding eligibility:

  1. Non-Profit Objectives: The primary eligibility criterion is that the company should have non-profit objectives. It means that the income and profits, if any, are utilized for promoting the stated objectives rather than being distributed among the members.

  2. Promotion of Charitable Purposes: The organization’s main purpose should be the promotion of charitable activities, such as education, art, science, sports, social welfare, religion, and environment protection.

  3. Prohibition of Profit Distribution: The company must have clauses in its Memorandum of Association and Articles of Association that prohibit the distribution of profits among its members. Any income generated should be utilized for the organization’s objectives.

  4. License from Registrar of Companies (RoC): To establish a Section 8 company, one needs to obtain a license from the Registrar of Companies (RoC). The RoC evaluates the objectives and activities of the proposed company to ensure they align with the requirements of Section 8.

  5. Name of the Company: The name of a Section 8 company should reflect its non-profit nature and typically ends with words like Foundation, Association, Society, Council, Club, Charities, Institute, Academy, Organization, or Federation.

  6. Board of Directors: The company must have a minimum of three directors for a private company and seven directors for a public company.

It’s important to note that the eligibility criteria and regulations might be subject to updates, and individuals or entities interested in forming a Section 8 company should refer to the latest provisions of the Companies Act, 2013, and consult with legal professionals for accurate and current information.

BENEFITS OF REGISTER SECTION 8 COMPANY

  1. Legal Recognition: Section 8 companies enjoy legal recognition as formal non-profit entities. This recognition provides credibility and legitimacy, making it easier to attract donors, partners, and volunteers.

  2. Limited Liability: Members and directors of a Section 8 company have limited liability. This means their personal assets are generally protected from the company’s financial obligations. In case of financial issues, the personal assets of the members or directors are not typically at risk.

  3. Tax Benefits: Section 8 companies are eligible for various tax benefits, which can significantly enhance their financial sustainability. These benefits include:

    • Exemption from income tax on surplus income: Any income generated by the company, which is used for its charitable or non-profit objectives, can be exempt from income tax.
    • Donor tax benefits: Donors who contribute to Section 8 companies can claim tax deductions under Section 80G of the Income Tax Act.
  4. Perpetual Existence: A Section 8 company has perpetual succession, meaning it continues to exist even if there are changes in membership or leadership. This ensures the organization’s continuity and long-term impact.

  5. Ease of Transfer: Section 8 companies offer more straightforward processes for transferring ownership or management compared to other non-profit entities like trusts or societies. This can be especially beneficial when there is a need for changes in leadership or governance.

  6. Enhanced Trust and Transparency: Section 8 companies are required to maintain proper accounts and adhere to strict regulatory and compliance standards. This focus on transparency and governance enhances trust among stakeholders, including donors and the public.

  7. Public Scrutiny: Registered Section 8 companies are subject to public scrutiny, as their financial statements and activities are available for public inspection. This transparency can enhance trust and accountability.

  8. Credibility: The legal recognition and formal structure of Section 8 companies contribute to their credibility, making them more attractive to individuals, institutions, and funding agencies interested in supporting charitable causes.

  9. Mission Focus: By design, Section 8 companies are oriented toward their stated charitable or non-profit objectives. They are not motivated by profit, which allows them to remain focused on achieving their mission and making a positive impact on society.

  10. Facilitated Fundraising: The legal recognition and tax benefits associated with Section 8 companies make fundraising more accessible. This can lead to increased opportunities for grants, donations, and other forms of financial support.

HOW AURIGA ACCOUNTING HELP YOU TO KNOW ABOUT SECTION 8 COMPANY

  1. Consultation: They can provide information and guidance on the legal and regulatory requirements for Section 8 companies.

  2. Registration Assistance: Assistance with the entire registration process, including obtaining a license, drafting necessary documents, and submitting applications to government authorities.

  3. Compliance Support: Ongoing support for compliance with legal and regulatory requirements, such as annual filings and record-keeping.

  4. Tax Advisory: Providing advice on tax benefits, exemptions, and strategies for optimizing financial sustainability.

  5. Financial Management: Offering financial management services and guidance for Section 8 companies.

  6. Audit Services: Conducting financial audits as required by law or as part of good governance practices.

  7. Strategic Planning: Assisting in strategic planning and fundraising efforts to advance the organization’s charitable objectives.

February 25, 2024

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