In this article, K.S. Aswin Seshadri pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the Benefits of setting up a Non-Profit Educational Institution in India.
A business structure is an organizational framework which is recognized in a particular country’s jurisdiction for conducting commercial activities like Partnership, Sole Proprietor, Company, Hindu Undivided Family etc. in India.
Since Education should not be considered as business, people who want to start an educational institution should consider a not-for-profit business model rather than a for-profit business model because it satisfies the owner’s interests and would act in the public interest. It is very hard for these not-for-profit organizations to raise funds unless it is sponsored by a rich person who wants to put money in a trust for the benefit of the society. Not-for-profit institutions will also face difficulties to raise funds when there is an economic downturn or when unemployment rates are high. However, the benefits that these Non-Profit Organizations receive are far more in number than the restrictions that they face.
What is Non-Profit Organization?
Non-Profit Organizations include trusts, cooperative societies or associations, and Companies which come under Section 8 of the Companies Act 2013. These organizations are created either for a charitable purpose or for the public good and they are usually exempted from paying taxes to the government. The surplus profits of these organizations are not distributed to the owners but to achieve the goals of the organization.
Types of Non-Profit Organization
A public trust is a form of non-profit business which is created for the purposes of education, relief of poverty, medical relief among other examples. Indian public trusts, in general, cannot be dissolved and are irrevocable in nature. However, no national law governs public trusts in India but different states have created their own state laws.
Societies are an organization of people created for charitable purposes. They are governed by a managing committee or a governing council. Societies are governed by the Societies Registration Act 1860 which has been adopted by various states. Unlike trusts, these societies can be dissolved.
Section 8 Companies
Section 8 of the Companies Act, 2013 provides for registration of an association of persons as a limited company where such association is formed for promoting commerce, art, science, education, religion, charity or any other useful object and the company intends to apply its profits or other income to promote its objects. The payment of dividend to its members is prohibited.
Since an educational institution provides a service for the betterment of the society, it would stand in good stead if it is incorporated as a Non-Profit Organization under one of these three business structures. Each of these three business structures has their own advantages and disadvantages but they all have one thing in common.
Comparison between Trust, Societies and Section 8 Companies
Public Benefit Status
One of the main advantages of having a Non-Profit Organization is trust, society or a Section 8 company. They are exempted from paying taxes i.e. they do not have to pay taxes on their income. Thus, the only option available to them is to use the profits to improve the organization. Also, the people who contribute to the organization are also eligible for tax exemptions for the contribution made by them to these organizations.
Public Trusts have to be created for the purpose of serving the needs of the public. Section 8 companies are incorporated for the limited purposes of promoting commerce, art, science, religion, charity or any other useful object. Education institutions come under the heading of charity and thus they can also avail tax benefits if they are created under one of these three business structures.
Public Charitable trusts are for the benefit of a large class of beneficiaries and must be for the benefit of the public. Since public trusts have a charitable intent, they usually prevent private remuneration. Even the Societies Registration Act of 1860 does not prohibit the remuneration of any earnings of the society to any private shareholder or individual. However the Indian Companies Act, 2013 specifically provides that no profits or earnings of the company will be distributed as dividend among its members.
So if the owner of the educational institution wants to see some profit from running the institution, he can either choose a trust or society as the business structure because both these forms of business do not prohibit the taking of earnings from them. However, even if the educational institution is incorporated as a Section 8 company, though the profits cannot be distributed the owners as directors of the company can take remuneration from the company for their services. Thus, remuneration in Section 8 companies are not completely prohibited.
A person’s proprietary interest in a Non-Profit Organization is related to the issue of remuneration. The trustees of a trust hold the assets of the trust in a fiduciary manner on behalf of the trust. Even though they have a legal right to the assets of the trust, they cannot use the assets in contravention of the interests of the beneficiaries. The members of the managing committee or governing council of the society or Section 8 Company hold the assets on behalf of the other members and contributors respectively.
Usually, trusts are irrevocable in nature. The trustees utilize the assets of the trust on behalf of the trustees. However, due to the negligence of the trustees, if the trust becomes inactive, then the Charity Commissioner can take steps to revive the trust. Also if the object for which the trust is created ceases to exist, then the Doctrine of Cypres will be applied wherein the funds will be applied to the nearest possible object. Thus, the trustees do not have to worry about the usage of the assets of the trust because even if the trust was to be wound up due to changing circumstances, then the trust’s assets would be used for a similar kind of object for which the trust was created.
However, unlike trusts, the Section 8 Companies and societies formed with the intention of serving the public can be dissolved. Also, the property and funds of these societies and companies will not be distributed to the members but they will be given off to some other society or company which has the same objectives.
Therefore, if the donors do not want their assets to go waste, they can create the educational institution as a trust so that the assets are used only for educational purposes and even if the trust has to be dissolved, the assets would be used for the same purpose. Thus, a trust would be a better option than Section 8 Companies and Societies if the donors do not want any dissolution to take place.
Maintaining of Accounts
Since these organizations are granted certain privileges by the Government. All the Non-Profit Organization is a trust, society or a Section 8 Company should maintain separate books of accounts for their economic and commercial activities, failure of which will lead to loss of income tax exemption.
Also, the Non-Profit Organization is prohibited from investing their funds or profits in any political activities or shares of public and private limited companies. This is prohibited mainly because such activities promote things which are not in consonance with the objects of these Organizations.
Therefore, if the educational institution is to be constituted as a Non-Profit Organization, it has to maintain a separate book of accounts and it will also be prohibited from investing funds in companies and political activities.
Benefits of Structuring Educational Institution as a Non-Profit Organization
- The Income Tax Act of 1961 provides an exemption to organizations which are created for any charitable purposes. Since an educational institution falls under the category of charitable purposes, the organization will be exempted from paying taxes.
- However, if the income of the organization is used for any charitable purposes outside the geographical boundaries of India, then it will only be exempted from paying taxes only if it comes under the general or specific orders of the Central Board of Direct Taxes.
- Also, these organizations are allowed to maintain the income which is begotten through the trust if they satisfy the criteria given under Section 11(2) read with Rule 17 of the Income Tax Rules 1962 and Form No.10. Also, the income derived from the trust can be maintained only under the modes specified in Section 11(5).
- Also under the amendments to Section 11(4A) of the Income Tax Act 1961, a trust, society or Section 8 Company is also exempted from paying taxes on income from businesses which are in consonance with the attainment of the objects of the organization.
- As mentioned earlier, the donors of these trusts and societies and shareholders of the Section 8 Companies are exempted from paying taxes for the contributions made by them to the organization. This is provided for under Section 80G of the Income Tax Act of 1961.
These are the main benefits of creating an Educational Institution as a Non-Profit Organization.
Management and Control
- Since the benefits given to these three types of organizations are relatively the same. The choice of business structure for the educational institution will mainly depend on the amount of control and management.
- Societies are considered to be the most democratic of three business structures available in hand. Founders can exercise control only if they have lifelong posts in the managing committees of the society and if they grant themselves special powers during the constitution of the society. However, trusts on other hand can be held by a single person even though a board of trustees might be present. This is because of the presence of trust deeds which grants all effective decision making power to a single person. Therefore, if the founder of the educational institution wants to maintain high level of control on decision making and economic matter of the organization, trust is the preferred form of business structure.
- Section 8 Companies function like any other company incorporated under the Indian Companies Act, 2013. Even though the Board of Directors takes care of the day-to-day activities of the Company, the shareholders have the ultimate power to elect and fire the directors.
Therefore, setting up an educational institution as a Non-Profit Organisation is the most suitable providing education to the public is less of a business activity and it should be considered as service to the society. Since most of the characteristics of these three forms of business structures are relatively similar in nature as it all depends on the amount of control that the founders wants to have over the educational institution. Also since the educational institution will be created as a Not-for Profit Organization, it can avail all the benefits provided to it by the government. Thus, the founder of the educational institution must concentrate more providing top quality educational services rather than focusing on achieving profit goals.
 Companies Act, 2013 Bare Act
 Section 8, The Indian Companies Act 2013
 https://www.legalraasta.com/can-section-8-company-make-a-difference/  http://www.ngosindia.com/resources/ngo_registration1.php
 Section 11(2) of Income Tax Act 1961
 Rule 17 of Income Tax Rules 1962
 Section 11(5) of Income Tax Act 1961
 Amendments to Section 11(4A) of the Income Tax Act 1961
 Section 80G of Income Tax Act 1961