In this article, Uday Agnihotri pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses legal Structures commonly used by NGOs in India.

Non-Governmental Organization

Non-Governmental Organizations (NGOs) are organizations engaged in a plethora of activities aimed at protecting and promoting the varied interests of the people. As the name suggests, NGOs are state independent voluntary groups working towards various social causes – ‘charitable purposes’. Section 2(15) of the Income Tax Act, 1961 explains charitable purpose as those activities aimed at the relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility[1]. These ‘Not-for-profit’ organizations differ from other businesses as the aim of such ventures is charity, not generating profits. Thus, NGOs are prohibited from distributing the income generated from their working among its members.

There is no single consolidated act dealing with the formation and registration of NGOs. This is because an NGO is an umbrella term for all charitable ventures. An NGO, in itself, can have various structures. These can be registered as societies, trusts and private limited, non-profit companies (commonly referred to as Section-8 Companies). Therefore, an NGO can be registered under any of the three acts i.e. Companies Act (2013), Societies Registration Act (1860) or Indian Trusts Act (1882).

Steps to start an NGO

Prerequisites

Prior to the registration of an NGO and its functioning thereof, there are certain prerequisites that are to be followed (or kept in mind):

The first step is to decide the concerns and the issues that the NGO would be dealing with. An NGO can deal with social issues such as poverty, education, woman empowerment etc. The purpose of the NGO would be guided by section 2(15) of the Income Tax Act, 1961. This will give direction to your actions and would ensure that your actions are in consonance with the objectives (in mind). This would, thus, ensure the meeting of ‘theory’ and ‘practice’. Hence, to plan and give objective and vision to your charitable venture becomes the first and one of the most important steps.

The next important step is the formation of a ‘governing body’ that would be responsible for taking all the decisions regarding the establishment, working and functioning of the NGO. Therefore, such a body would deal with all important matters from planning, fund raising, human resource, IT etc.

The next step is the formulation of a Memorandum of Association (MOA). It is not merely a procedural formality, but a legal requirement. The MOA should include details such as the name of the NGO, its members, address of the office, addresses of the members, mission and objectives, rules and regulations of the NGO etc.

Registration

After the prerequisites have been met, the NGO can be registered as per the provisions of any three of the Acts i.e. (Companies Act (2013), Societies Registration Act (1860) or Indian Trusts Act (1882)).

1. NGO as a ‘Section-8 Company’: If the NGO is intended to be in the form of an organization ‘for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object[2]’, the NGO can be registered as a ‘Section-8 Company’. Thereafter, it has to function as a not-for-profit organization and thus, all profits generated during the course of its functioning have to be applied for promoting the objectives of the organization i.e. no dividend can be paid to the members of the company.
2. NGO as a Society: An NGO with seven or more members can be registered as a society (under the provisions of Societies Registration Act). Even though the process of registration is more cumbersome and complex than other methods, a society gives more flexibility in its functioning and working.
3. NGO as a Trust: A charitable trust offers the simplest process of formation. It is not legally required to get a trust registered. However, registered charitable trusts enjoy certain benefits and exemptions such as income tax benefits. The subject-matter of a trust must be property transferable from one person to another.

Fund Raising

The next step after the registration process is complete is the raising of funds. Funds are necessary for the working of the NGO. And the required funds can be raised from two sources i.e. internal sources as well as external sources.

1. Internal sources: NGOs majorly depend on internal sources for funds. These funds are generated from within the organization. These types of sources include subscription, donation, membership fees, charges etc.
2. External sources: Funds generated from outside the organization are covered under external sources. Grant-in-aid from the governments, grants or loans from private individuals or institutions within the country or inflow of foreign funds are termed as external sources.

Network

No organization can work in isolation. Therefore, it is necessary for an NGO to develop its network with government agencies, other NGOs, media, institutions such as schools, hospitals etc. This would not only help generate more funds for the NGO or more participation in the NGO but would also be important for spreading awareness and the benefits of the activities undertaken by the NGO. Thus, helping the NGO achieve its objectives in a more efficient and seamless manner.

After understanding the steps for the formation of an NGO, it is imperative to look at the various procedures involved and the benefits provided by the three structures of the NGOs i.e. NGO as a Section-8 Company, Society or Trust. This would help choose the ideal form for the purpose of which the NGO has to be established. Therefore, there are certain factors upon which this decision rests. These factors include time constraints, aims and objectives of the NGO, required funds, fund raising ability, location of the NGO, amount of flexibility desired etc.

Section – 8 Companies Act, 2013

To register as a Section-8 company, the provisions regarding incorporation of a company as contained in the Companies Act, 2013 would be applicable. Thus, Section-8 companies would be governed by the same act throughout the country. In this sense, they are very similar to other limited companies. Only few differences exist such as a section-8 company does not have to add the word ‘limited’ at the end, the income generated through its working cannot be paid as dividend to the shareholders, it enjoys tax benefits which are enjoyed by the trusts etc. The incorporation and the registration of the section-8 companies are also similar to that of normal companies.

Thus, Memorandum of Association (MoA) and Articles of Association (AoA) form the cardinal documents of the Section-8 Companies too. Apart from the normal procedure, an application ‘Form INC-12’ has to be submitted to the Registrar to grant the permission to drop the word ‘limited’. A minimum of three trustees are required for the incorporation of such a company however, no upper limit has been provided for. It is important to note that such a company can be found only if the intention of such a company is ‘for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object[3]’.

It usually takes around 3-6 months for completing the formalities and legal requirements. Even though it takes comparatively longer time to establish, it is preferred by many because it can generate lot of funds on one hand (by issuing new shares) and it also leads to democratization of the decision making power as every member gets voting rights proportionate to their shares. Thus, it ensures higher level of participation and involvement of the maximum people.

Society

An NGO can be established as a society under the Societies Registration Act, 1860. Section 20 of the Act lays down certain areas of working in which an NGO can be formulated as a society. These include Charitable societies, the military orphan funds or societies established at the several presidencies of India, societies established for the promotion of science, literature, or the fine arts for instruction, the diffusion of useful knowledge, the diffusion of political education, the foundation or maintenance of libraries or reading-rooms for general use among the members or open to the public, or public museums and galleries of paintings and other works of art, collections of natural history, mechanical and philosophical inventions, instruments, or designs.[4]

It is imperative to note that, unlike Section-8 companies that are governed by the provisions of the same act throughout the country, Societies are governed by the respective state acts (in the absence of which, they are governed by the Societies Registration Act).  Legally, minimum 7 members are required in the managing committee of a society. For registering as a society, certain documents such as the Memorandum of Association (MoA), Document enlisting the rules and regulations governing the society and other documents from the members such as affidavits, consent letters etc. The incorporation of a society takes around 1-2 months only. Moreover, a society is more democratic and provides more flexibility than other forms by providing powers and duties in the documents themselves.

Charitable Trust

An NGO can be established as a trust when there is a property involved. Thus, the subject-matter of a trust must be property transferable from one person (settlor) to another (trustee). The trustee must act according to the ‘trust deed’ and utilize the property for the benefit of the ‘beneficiary’. A public trust is governed by the laws passed by the respective states (in the absence of which, it will be governed by the Indian Trusts Act). With regards to immovable properties, a written trust deed is necessary which is to be registered with the Sub-Registrar whereas, with respect to movable properties, no written document is required by law. A trust deed includes the terms of the trust, number of trustees, objective of the trust etc. The trust deed, accompanied by an application form, has to be submitted for registration. The trust takes around 2 days to one week for its formation and hence, is the quickest one out of the three forms. Furthermore, trustees have a high level of control as more often than not all powers are vested with one person only. Thus, a trust facilitates quick decision making and centralization.

It is imperative to note that when an NGO adopts any form, only its structure varies. Along with the structure, there may be some rights or limitations associated. However, there is no difference in the status of the NGO. An NGO formed under any provision (Company, Society or Trust) is at par with other NGOs that may differ in structure. Thus, a person should analyze various advantages (or disadvantages) associated with a particular form and then decide accordingly whether to form a company, a society or a trust so as to facilitate the objectives of the NGO.

References

[1] Section 2(15) of the Income Tax Act, 1961.

[2]  Section 8 of the Companies Act, 2013.

[3]  Supra.

[4]  Section 20 of the Societies Registration Act, 1860.