Incorporation of a company
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This article is written by Srishti Kaushal, a first-year student of Rajiv Gandhi National University of Law, Patiala, Punjab, pursuing B.A. LL.B. (Hons.). In this article, she discusses the requirements and procedure for incorporating a company under Section 8 of the Companies Act 2013, and its advantages and disadvantages.

Introduction

Have you ever wondered how can you establish a school? Or form a company to give your passion to take care of animals a professional flight? Or fulfill your dream of providing a platform for students to learn sports by opening a sports academy?

Well, to do all of this you need to establish a company under Section 8 of the Companies Act 2013.

In this article, we will understand what all companies can be formulated under Section 8 of the Companies Act. It talks about the formation of companies with charitable objects, etc, how are such companies incorporated and the advantages and disadvantages of incorporating a company under this section.

What type of company can be incorporated in Section 8 of the Act?

Not every company is formulated with the purpose of making profits. At times companies are formulated for purely charitable and non-profit purposes. Such companies are given recognition under Section 8 of the Companies Act, 2013. This section deals with the formulation of companies with charitable purposes. For this reason, these companies are often referred to as Section 8 Companies. 

This section defines such a company as a company whose primary objective is to promote art, commerce, science, sports, research, social welfare, religion, charity or protection of the environment, or any other such purpose. Such companies use all profits and income earned towards furthering their objectives and do not pay any dividend to its members. Hence, the basic purpose of the Section 8 companies is to promote welfare in society and encourage its development.

Let’s look at some examples of companies established under Section 8:

  • Federation of Indian Chambers of Commerce and Industry, 
  • Reliance research institute,
  • Reliance Foundation,
  • A deemed University like Christ University,
  • Over the Counter Exchange of India (OCE), etc.

Requirements to incorporate a company under Section 8 of the Act

Before we move on to discuss the procedure for incorporating a company under Section 8 of the Companies Act, you must know about the basic documents and requirements needed for incorporating such a company. These are as follows:

  • There must be at least two directors.
  • At least one of the directors must be an Indian resident.
  • In case the directors and promoters are Indian nationals, income tax- PAN of all of the directors is necessary. Other identity proofs which may be given along with this are Voter ID/Aadhar Card/Driving License.
  • In case the director is a foreign national, passport is required as an identity proof. 
  • Any proof of residence. This can include electricity bill or telephone bill etc. This document must not be older than two months.
  • Latest passport-sized photo of all directors and promoters.
  • Address proof of the registered office of the company. This can be the rent agreement and receipt. In case this is owned by the director, any document establishing such ownership, such as the sale deed, is required.
  • Director identification number, if any.
  • Digital certificate, if any.
  • Memorandum of Association.
  • Articles of Association.

Procedure of incorporation under Section 8 of the Act

Now that we know what all is required to incorporate the Section 8 company, let us look at what all you need to do to get it incorporated.

Step 1- Obtaining documents and arranging them

First and foremost thing you need to do if you wish to incorporate a company under this section is to collect all the essential documents, which are mentioned above.

  • As prescribed in Section 153 of the Act, if any person wants to be appointed as a director of a company, he/she must apply for allotment of a director identification number (DIN) to the Central Government. Section 8 companies are no exception to this rule. The proposed directors must apply to get DIN along with incorporation in SPICe (Simplified Proforma for incorporating a company) INC 32 Form.
  • Apart from DIN, Digital Signature Certificate (DSC) is also required. DSC acts as authorisation proof for online transactions and filing forms. This can be obtained from any DSC vendor (BE-Mudra, TCS etc.).

Step 2- Get the name of the company registered

This is where the process of incorporation actually begins. To get the name of your company registered you must make and log into your account on the MCA website (https://www.mca.gov.in/MinistryV2/homepage.html). 

Here, you need to open an online form by clicking on the icon ‘RUN’ (Reserve Unique Name). This form is to be filled online, and cannot be downloaded. Information that is to be given in this form includes the type of entity (Section 8 company, in our case); proposed name; comment; and also need to upload the required files if asked for. Along with the form, you are also required to pay the fees. 

A section 8 company must have a name ending with words like foundation, association, forum, federation, confederation, council, etc. 

The name approval process can take 24 to 72 hours.

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Step 3- Drafting the Memorandum of Association and Articles of Association 

Once the name has been approved, you are required to draft the ‘Memorandum of Association’ (MOA) and ‘Articles of Association’ (AOA). These documents contain the objectives of the company. Before understanding this process in detail, let’s understand what these documents are.

The ‘Articles of Association’ basically contains the rules for the internal regulation and management of the company. The Memorandum of Association, on the other hand, describes the scope, objectives, and powers of the company.

The format for MOA is given in Form INC-13 and contains 13 clauses.

Step 4- Obtaining a license

Once the MOA and AOA have been drafted, you must obtain a license from the central government. For this e-form SPICe INC- 32 has to be filed along with the prescribed fees. 

It is also mandatory to mention the details of PAN & TAN in the Form INC-32. It is also compulsory to fill in the details of GST in the form. SPICe is filed along with the following documents:

  • Memorandum of Association.
  • Articles of Association.
  • Affidavit given by the first subscriber of the company in form INC-9.
  • PAN card of directors and subscribers.
  • Proof of registered office.
  • No Objection Certificate of owner/ director if the registered office is owned by him/her.

Step 5- Obtaining a certificate of incorporation

Once all the requisite forms are filed with the Registrar of Companies, he needs to get satisfied with the content of the documents filed. Once he is completely satisfied, a certificate of incorporation would be issued to the Section 8 company in electronic form in form INC 11. It will also be mailed to the Company (to its registered email id). 

The forms can be downloaded from the following link: http://www.mca.gov.in/MinistryV2/companyformsdownload.html

Features of a company incorporated under Section 8 of the Act

Section 8 have certain peculiar features. Let’s look at them in detail.

  • A company incorporated under this section would not be treated as a small company.
  • A Section 8 company would be treated as a limited company. It would enjoy all such benefits and have all such obligations as a limited company.
  • There is no limitation of a certain amount of minimum capital for a Section 8 company.
  • Though the company is treated as a limited company, the words ‘Private Limited’ or ‘limited’ are not affixed with it.
  • The Central Government can delegate its powers to the ‘Registrar of Companies’ (CRC). This means that the application for registering the company is to be made to the CRC having jurisdiction in the area where the registered Company is to be situated.
  • A firm can also become a member of a company incorporated under Section 8. However, if the firm dissolves while the company is still existing, the membership will cease. Though, individually, partners of the firm can retain their membership.
  • A Section 8 company can convert itself into any other kind of company by meeting the prescribed conditions.
  • A section 8 company can amalgamate only with a company with a similar objective. 

Advantages of incorporating a company 

Section 8 Companies work purely for public welfare. For this reason, they are given certain benefits. Let us look at the advantages of incorporating a company under Section 8 of the Companies Act, 2013.

  • Unlink other entities, there is no prescribed minimum capital required for a Section 8 company. Their capital structure can be altered as and when required.
  • A section 8 company is not required to pay stamp duty which is otherwise required to be paid at the time of registration. 
  • Any of the registered partnership firms can be a member of a Section 8 company, in its individual capacity.
  • There are many tax exemptions provided to companies registered under Section 8 of the Companies Act 2013. For instance, the donors of a Section 8 company, get tax deduction benefits under Section 12AA and 80G of the Income Tax Act.
  • A company registered under Section 8 of the Companies Act 2013 is considered to be more credible than any other Not for Profit Organisation (NPO), like a trust. This is because, under this section, the company gets licensed by the Central Government which may put strict regulations on. This creates a more reliable image for the company.
  • The duration of registering a Section 8 Company is not very long. In fact, It generally takes only around 30-45 working days (sometimes even less) to register a Section 8 company.
  • A Section 8 company, just like any other company, is considered a separate legal entity. It has its own legal standing, separate from its members. Thus, it can be sued and sue in its own name. It also has a perpetual existence.
  • There is a lot of flexibility in Section 8 companies since the process for transferring ownership/ title is much easier in these.
  • A Section 8 company is free to not add any suffix, like limited, to its name.

Disadvantages of incorporating a company 

There are certain disadvantages to incorporating a Section 8 company. These are:

  • Such a company is not allowed to alter the provisions of its ‘Memorandum of Association’ or ‘Articles of Association’ without getting approval from the Central Government.
  • It cannot use its profits for any other purpose except furthering its own objectives. Moreover, it is barred from distributing its profits among the members as a dividend.
  • The Central Government is allowed to place certain restrictions on the Section 8 companies. If such restriction is placed, then such a company is required to include them in their ‘Memorandum’ and ‘Articles of Association’.
  • No member related to a Section 8 company is allowed to be appointed as a remunerating officer.
  • The members of these companies do not really enjoy benefits. They can only be reimbursed for the pocket expenses they have incurred in the course of operations.
  • Though there some tax exemptions provided on these companies incorporated under Section 8 of the Act, they are not given 100% exemption and thus, they do have to pay tax.

Conclusion

India still lacks behind in many areas in regard to education, healthcare, sports training etc. These aspects are provided by many nonprofit organisations. 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.

References

  1. https://taxguru.in/company-law/incorporation-section-8-company-company-law.html
  2. https://taxguru.in/company-law/simplification-process-incorporation-section-8-companies.html
  3. https://legaldocs.co.in/section-8-company
  4. https://www.icsi.edu/media/webmodules/publications/FAQs_on_Section_8_Companies.pdf

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