All you need to know about Section 8 Companies

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Section 8 Companies
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In this article, Jitika, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses Section 8 Companies in India.

Introduction

What is Section 8 and what are Section 8 Companies?

Section 8 of the Companies Act 2013 provides for the formation of the companies with charitable objects etc. Section 8 Company, (earlier Section 25 Company of the Companies Act, 1956), is a legal entity for Non-Government or Non-Profit Organizations.

Examples of Section 8 Companies

Infosys Foundation, Reliance Foundation, TATA Foundation, Reliance Research Institute, OTC- Over the Counter Exchange of India, etc

Objectives of Section 8 Company

It is a type of company which is established with the objective to promote commerce, arts, science, sports, education, research, social welfare, protection of the environment or any other such object. The main purpose of Section 8 Company is essentially to work for the welfare of society in any of the above-mentioned fields and is formed in Public Interest

A Company, whether Private Limited, LLP or Public Limited, who work towards the objective of social welfare, without any intention to get any kind of profit or dividend can function as a Section 8 company.

A Section 8 company is registered under the central government under the Ministry of Corporate Affairs.

Features of Section 8 companies

No dividend

Members of the Company don’t get any dividend.

Profits

Any kind of Profit or incomes of the Company is applied only for the promotion of the objects of the Company.

Special License

Also called Licensed Company, unlike the formation of any other company, it is essential for Section 8 Company to get Special License from Central Government. Every requirement to form a company must be followed but in case of Section 8 Company, a Special License is required for its incorporation by submitting an application to ROC. Rule 19 of the Companies (Incorporation) Rules, 2014 provides for the issue of the License for the Section 8 Company under a procedure to be followed.

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Status

According to the Section 8(2) – Section 8 Company shall enjoy all the privileges and shall be subject to all the obligations of the Limited Company.

Incorporation under Form INC-29

The Section 8 Company cannot be incorporated by the Form INC-29.

Use of Suffix

Section 8 Company cannot use suffix ‘Pvt Ltd’ or ‘Ltd’ with its name.

Not a Small Company

A Section 8 Company shall not be treated as a Small Company.

Power of Registrar of Companies (‘ROC’)

The Central Government’s power is delegated to the ROC, which has jurisdiction over the area where the Registered office of the company is to be situated.  Hence, the application for registering the company is to be made to the ROC.

Conversion into a One Person Company

Section 8 Company cannot be converted into One person Company.

Amendment in Articles

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Articles of Section 8 Company can only be amended with prior approval of Central Government, otherwise, the Articles cannot be amended.

Firm as the member of Non-Profit  Company

According to the Section 8(3) of Companies Act, 2013, a partnership firm can become a member of the non-profit company registered under the Section 8. Such membership of the firm shall cease upon dissolution of the firm. Though, partners of that dissolved firm can still continue to be the members of the company in their individual capacity.

Transferable Ownership

Unlike other businesses, where it is not possible to transfer ownership easily, In Section 8 company, the shares and other interest of the members are considered to movable property and are easily transferable as provided by the Articles. Due to which it is easier to leave the membership of Section 8 Company or to transfer its ownership.

Shareholders and Directors

  1. The Company must have at least 2 shareholders.
  2. At least 2 Directors are essential.
  3. The Directors and the Shareholders can be the same person.

Share Capital

No minimum share capital required. The necessary funds are brought in the form of donations, subscriptions from members or the general public.

Limited Liability

One of the benefits of Section 8 Company is its Limited Liability. In simple words, in case any liability rises, the members of the company are not personally affected; members are liable for unpaid shares held by them and not more than that.

Greater Flexibility

A Section 8 company is not required to perform as many legal formalities as a public company. It tends to enjoy the special exemptions and privileges under the company law.

Separate Legal Entity

The most prominent quality of a Section 8 Company is its Separate Legal Identity. In a Section 8 Company, the company and its members have completely distinctive identities.

The Registration Procedure

The steps of the procedure for the incorporation of the Section 8 Company is as follows:

Step 1: To obtain the required documents and arrange them in the necessary order

The essential documents are –

  • Identity Proof: Copy of the Permanent Account Number (PAN) of all the Directors and Promoters (Mandatory);
  • Proof of Address:  Copy of a valid Passport/Driving License/Aadhar Card/Telephone or Electricity Bill, not older than 2 months;
  • a recent passport size photograph of the Directors/Promoters;
  • Incase if the office premises are taken on rent then A Rent Agreement or Leave & License Agreement is mandatory;
  • The Utility Bills of the registered office
  • The Consent to act as the Director in the Form DIR-2
  • The details of Directors’ Directorship in any other Companies/LLPs, if any.

Step 2: Preparing DSC and DIN

Obtaining Digital Signature Certificate (DSC) and  Directors Identification Number(DIN) for all the directors and promoters of the company.

Step 3: Name Approval

An application should be filed in Form INC-1 to the Registrar of Company (Central Registration Centre – CRC of Ministry of Corporate Affairs). For name approval maximum six names may be provided by the applicant. The approved name has the validity of 60 days. The name must include the words such as foundation, association, forum, council, chambers, etc. as in accordance with the Company (Incorporation) Rules, 2014.

Step 4: Drafting MOA and AOA

Draft the Memorandum of Association and Articles of Association of the proposed company in Form INC – 13

Step 5: Applying for License

File an application in form INC 12 along with the prescribed fees to register for a license and after the attachment of required documents.

Step 6: Filling forms with ROC

Forms like Form No. INC – 7, Form No. INC – 22, Form No. DIR – 12 along with the appropriate documents are to be filed with ROC.

Step 7: Getting Certificate of Incorporation from ROC

If the Concerned ROC is satisfied with the incorporation forms, A Certificate of Incorporation is issued by the Registrar of Companies with a unique Company Identification Number (CIN), after the ROC is satisfied with the filed forms and documents.

Revocation of the license

As per the Rule 8(6) the Companies (Incorporation) Rules, 2014 the Central Government may revoke the license of the company if the company breaches any of the requirements of this section or violates any of the conditions or any activity of the company which are conducted fraudulently or are  in contrast to public interest.

Without prejudice, the Central Government can direct the company to convert its status to Private or Public Company and change its name by adding the suffix ‘Limited’ or ‘Private Limited’ and there upon the Registrar shall register the company accordingly.  The Central Government may direct such company to be wound up or amalgamated with another company that is registered under this section. But such orders can only be given after the company has been given a reasonable chance to be heard. And then a copy of the order is given to the Registrar.

Penalty

In case a company violates the term laid down in Section 8, Sub-section (11) of Section 8 of the Companies Act states the company shall be punishable, subject to the fraudulent actions of the company –

  • with fine not less than 10 Lakh rupees and which can be extended up to 1 Crore rupees,
  • Every directors and officer of the company in default shall be punishable with imprisonment for a term which can be of three years with fine which shall not be less than 25,000 rupees but which can extend to 25 Lakh rupees,
  • Or with both.

Exemptions for Section 8 companies (only applicable to Section 8 Companies)

Company Secretaries not mandatory

The companies are not required to appoint a company secretary. This relaxation results in cost reduction of the Section 8 companies but also leads to loss of work for the company secretaries.

No requirement for minimum share capital

As with the relaxation announced for private limited companies, Section 8 companies are also no longer required to have a minimum share capital.

Shorter notice period for Annual General Meetings

By the amendment in Section 101, the new provision states that only 14 days’ notice shall be required to summon an Annual General Meeting ‘AGM’ of a Section 8 company. Earlier the limit was 21 days same as Private Ltd or Ltd companies.

The recording of the minutes of meetings is not needed unless required

Section 118 requires recording of minutes of the proceedings of the general meetings, board meetings or any other resolutions, including the ones passed by the way of postal ballot, shall now no longer apply to the non-profit enterprises. 

Number of directors required

  • Section 149(1) shall no longer apply to the Section 8 Company, this implies that the companies shall not be required to have a min. no. of directors on its board.
  • The quorum for board meetings is fixed at 2.
  • Likewise, clauses regarding the appointment of independent directors are waived. Now no independent directors are required to be appointed by the Section 8 Companies.
  • Though a meeting of the directors is still being required to be held once in every six months, Section 8 companies are no longer required to take the first meeting of the board within the 30 days of its incorporation.

Directors taking up positions in other companies

A person can, now, be a director in more than 20 Section 8 Companies. Restriction however still is the same for other types of companies.

No committees required

Section 8 companies are, now, not required to form committees to determine the individuals for the nomination to the board, or to determine the remuneration of the existing and the incoming directors.

Meetings only for certain decisions

The board has been further empowered by the modification of section 179 to take decisions regarding the borrowings, investments and granting of loans or the advances by the way of circulation unlike where such decisions were made by calling a meeting of the board.

Income Tax Exemptions

Section 8 Companies

According to Section 12AA, an application is to be filed to the Income-tax commissioner with the required supporting documents. On the satisfaction of the commissioner, he shall grant the tax exemption to the company.

Though, it is essential to comply with Section 11 to Section 13 so as to avoid revocation of exemption.

Donators

This exemption is claimed under the section 80G. Only on the registration of the Section 8 Company, a donator is exempted from the tax. This exemption can be filed along with Section 12 Exemption or anytime after that.

 

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7 COMMENTS

  1. Dear Jitika. I read your article, it’s really outstanding, very knowledgeable. I will appreciate if you more elaborate about the way a `section 8 company ‘ borrow funds for working capital. I am asking because I am serious to start this type of business for needy community. I will highly obliged if you give me your contact number. Regards.

  2. Is TDS applicable on payment to vendors for various services rendered to an RWA (Residents Welfare Association) which collects maintenance from dwellers /residents and maintains residential complexes ?

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