Section 8 Company

What are The Compliances For Section 8 Companies?

In this article we shall look into the compliances and benefits of incorporating a non-profit organisation as a company under section 8 of the income tax act.

Traditionally, not-for-profit organisations have always operated as Associations, Trusts and Societies. The main reason for this was that profitability was one of the quintessential terms in the definition of a business. However, the organisational benefits and the virtue of perpetuity that came along with registering an organisation as a company would undeniably be helpful to a non-profit organisation as much as it would for a profit-seeking organisation. And it was not like non-profit organisations operated any differently than the profit seekers. The only difference between the two is in the distribution of the surplus of income over expenses. Section 25 was the original section under which a non-profit organisation could register itself as a company. But after the Companies Act, 1956 was updated and cleaned up by the Companies Act,2013, the registration of non-profit organisations was reclassified under Section 8. Lets Discuss about section 8 company Compliances in this article.

As per section 8 of the companies’ act, 2013, an NGO with no profit motive can register as a company and be regulated as one by the registrar of companies. And with the Companies Act, 2013, the compliances required to incorporate a section 8 company have been simplified and the entire process has been brought online which was not the case earlier. 

What is Section 8 Company?

A Section 8 Company, registered under the Companies Act 2013, is a company that has been incorporated with the main objective of promoting commerce, art, science, sports, education, research, social welfare, religion, charity, and/or protection of the environment. The quintessential requirement of to be registered under this section is that the surplus of income over expenses cannot be distributed as an income amongst any stakeholders and has to either be reinvested into the corpus of the organisation or donated to a similar cause as its own.

Provisions for Section 8 company

    • Minimum paid up capital requirement for Section 8 Company registration: Section 8 companies need not have a minimum paid-up capital of Rs. 1 lakh or Rs. 5 Lakh as may be applicable, resulting in the reduction of cost of registration of such companies.
    • Annual General Meeting Requirement in Section 8 Company: The time, date, and place of the Annual General Meeting, as per section 96(2) state every company other than an OPC is required to call its AGM during business hours (between 9 am to 6 pm) on any day except a national holiday. Such a meeting shall take place at the registered office of the company or within the city, town, or village in which the registered office is situated.
    • Notice Period for General Meeting in Section 8 Company: Section 101(1) requires that a minimum of fourteen days’ notice be given before a general meeting of a company may be called.
    • The Time Period for Sending Financial Statements of the Section 8 Company: An extension of seven days has been granted to section 8 companies for sending copies of their financial statements, auditors report, etc. to their member’s debenture trustees, etc. Section 118 requires a company to prepare and sign the minutes of the proceedings for every general meeting of shareholders or creditors within 30 days from the conclusion of such a meeting. It requires the minutes from AGM’s be consecutively numbered. It further details what should and should not be included in the minutes, in addition to the punishment for tampering with minutes to their member’s debenture trustees, etc.
    • Minutes of Proceedings from Meetings: A relaxation from section 118 has been provided to section 8 companies, except where the AOA of such a company contains a provision for confirmation of minutes by circulation. Hence no provision of section 118 relating to minutes of proceedings from general board meetings etc. shall apply to section 8 companies, except where its AOA contains a provision that minutes have to be confirmed by circulation.
    • Appointment of Director in Section 8 Company: Section 8 Company can now appoint any number of directors. There is neither a minimum requirement nor a restriction of a maximum number of directors that can be appointed by such companies. Also, a special resolution is not needed for appointing more than 15 directors. As per the notification subsections (4) to (11), 12 (i) and (13) of section 149, section 150 and proviso to section 152(5), this section has been amended to change the quorum requirement for Section 8 companies to either 8 directors or 25% of the total strength, whichever is lower.
    • Powers of Board in a Section 8 Company: The powers of the board under clauses (d), (e) and (f) of section 179(3) may be exercised by the board of Section 8 companies by circulation instead of a meeting. Hence, the directors may exercise these powers by passing resolutions through circulation instead of a meeting. These powers include borrowing money, investing the funds from the company, granting loans, or giving a guarantee and providing security in respect to loans.
    • Audit Committee: The audit committee of a section 8 company need not have independent directors forming a majority.
    • Nomination and Remuneration Committee and Stakeholders’ Relationship Committee:

Section 178 shall not apply to Section 8 companies. Thus it is not required to form any of the above-mentioned committees.

    • Related Party Transactions: This section shall apply to section 8 company only with reference to transactions under section 188 exceeding Rs. 1 lakh. Hence every director of a Section 8 company shall disclose the nature of his concern or interest at a board meeting if the related party transaction exceeds Rs. 1 lakh, and he shall not participate in such a meeting.

Compliances for section 8 company:

A Section 8 Company must meet the same annual compliances as other normal companies registered under the Companies Act.

  • Organising a minimum of two board meetings per year.
  • Required audit of the books of accounts.
  • Annual returns, as well as other e-filing forms such as MGT-7, AOC-4, and so on.
  • Personal income tax returns
  • Additional compliances to fulfil registration requirements under sections 12AA, 80G of the Income Tax Act, applicable to donations, and so on.

Benefits of registering a section 8 company

Incorporating a section 8 company is a lot more tedious and lengthier than incorporating a trust or association or a society. But there are certain benefits that come with incorporating a section 8 company that cannot be enjoyed by organisations operating as societies, associations or trusts. Let us look at some of the benefits.

  • A separate legal identity: A Section 8 Company, like all other companies, is given the status of an artificial person. Which means that even though it is not a real person, it will be treated as a separate and distinct person from the promoters or founders of the organisation. This creates a buffer between the company and its founders / promoters from any punitive or other liabilities the organisation may incur. This distinction is known as a ‘corporate veil’ in technical terms.
  • No stamp duty: Unlike other for-profit companies, a Section 8 Company is exempt from paying stamp duty on the Memorandum of Association (MoA) and Articles of Association (AoA).
  • No minimum capital requirement: Given that a non-profit organisation operates on the funds received through charity or donations, the requirement of having a minimum share capital as an investment has been waived for section 8 companies. This allows a company to register itself under the act and then register under section 12A of the Income Tax Act, so that the company can pass on tax exemption benefits to the donors. If the company seeks any donations prior to incorporating the company and getting the section 12A registration then the donor cannot seek income tax relief in that matter.
  • Name: Suffixes such as “Public Limited or Private Limited” are not required next to a Section 8 company’s legal name. These companies can be registered with names such as “Society, Association, Council, Charities, Club, Foundation, Institute, Academy,  Federation, and Organisation”.
  • No Need for CARO: All companies have to follow the provisions of Companies Auditor’s Report Order (CARO).This means every company has to have a statutory audit done for their businesses before filing their tax returns. Given that almost all Section 8 companies are likely to be tax free, the provisions of CARO are unnecessary and not applicable to them
  • Tax benefits: Many tax benefits are available to Section 8 Companies in India.
  • Credibility: When a company is registered under section 8 of the Companies Act, it lends more credibility to the organisation and its initiatives. This is because when an NGO is registered as a company, there are certain mandatory compliances it has to follow which lead to a general scrutiny almost every year. Knowing that there is a proactive regulatory body for the organisation along with a functional forum for redressal of grievances, it boosts the organisation’s brand value. Besides, there are rules for managing a company’s profits and losses under the Companies’ Act which mitigates the risk of misappropriation, which is often the fear when making a donation.
  • Exemption to donors: Donors who contribute to a Section 8 company are qualified for tax exemptions under sections 12A and 80G of the Income Tax Act.
  • Membership of partnership firms: A section 8 Company can accommodate a partnership firm as a shareholder which can be represented by a partner of the firm in the board of directors.

Conclusion:

Compliance can be tedious and difficult to follow up on, especially when it comes to a start up where all the energies of the management are being directed towards building the company. So it is always better to engage a trained expert like a company secretary or a chartered accountant who can keep track of the compliance calendar and make sure yout compliances are met on time and smoothly. If you have any other queries with regards to compliances or need assistance with your compliances, then get in touch with us and we will ensure that you get the best assistance for your requirements.

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