October 10, 2023

All about Incorporation of Non Profit Companies (Section 8 Companies) in India

Section 8 companies, i.e., Non-profit organisations (NPO) is quite a famous concept. As the name itself depicts, companies incorporated without any profit motive but are formed with the motive of promotion of arts, environment, sports, science etc. are incorporated under Section 8 of Companies Act.

If you ask experts: Why should non-profit organisations adopt company structure? The answer will include low formation cost, exemption from stamp duty, tax benefits under section 80G, separate legal entity from its founders, more credibility in society, etc. Then, the next question will be how one can register a section 8 company in India.

This article in FAQ format will provide an answer to your question.

1. Who is eligible to create a section 8 company

An individual or Association of Individuals are eligible to form Section 8 companies if it carries the objective of promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object.
Such an objective is required to be proved to the Central Government.
Section 8 company can be incorporated either as private limited company or public limited company.

2. What are the restrictions put on a section 8 company

A section 8 company once registered cannot do the following:

Distribute its profits as dividend among its members; or
Apply its profit or income in any objective other than promotion of its own objectives.
Alter the memorandum of association (MOA) or articles of association (AOA). However, with the special resolution and Central Government’s approval, MOA or AOA can be altered.
Amalgamate with any other type of company. However, it can amalgamate with another section 8 company.

3. What are the minimum requirements to create a section 8 company

Following are the minimum requirements for creation of section 8 company:

Minimum number of members: A minimum of 2 or 3 persons are required to incorporate a section 8 company.
Minimum number of directors: A minimum of 2 directors are required for incorporating a section 8 company.
Minimum capital: As a part of ease of doing business initiative, the Government of India has removed the requirement of minimum capital for incorporation of a section 8 company

4. What documents and forms are required to incorporate section 8 company

According to the section 8 of Companies Act, 2013 read with the Companies (Incorporation) Rules, 2014, a person or group of persons desirous of forming section 8 company should keep the following documents ready for incorporation process:

MOA and AOA
Declaration by an advocate, Chartered Accountant (CA), Company Secretary (CS) stating that MOA and AOA have been drawn up in accordance with provisions of section 8 of the Act and rules made thereunder.
Declaration on stamp paper by each applicant and should be duly notified.
Correspondence address till finalisation of registered office or address for registered office.
Name and address with documentary evidence of directors and subscribers to MOA
Passport size photographs of directors.
DIN and DSC of all directors.
Rent agreement, if applicable or utility bill (owned property) in respect of registered office.
Self-declaration by first subscribers and consent of directors
An estimation of the company’s future annual income and expenditure for the next three years.

After collecting all documents at one place, a professional can be approached to comply with legal formalities for incorporation for submission of following forms with the Registrar on MCA portal:

SPICE +: Application for incorporation of section 8 company with the facility of one name reservation, licence application, PAN.

Form INC-13 : Memorandum of Association

Form INC-22: Notice of registered address of registered office. It can also be provided within 30 days of incorporation

Form DIR- 12: Intimation about appointment of directors. It can also be provided within 30 days of appointment.

Form INC-14: Declaration by an advocate, CA, CS stating that MOA and AOA have been drawn up in accordance with provisions of section 8 of the Act and rules made thereunder. This form will go as an attachment to SPICE+.

Form INC-15: Declaration by each applicant. This Form will go as an attachment to SPICE +

Upon successful submission of all forms and verification of such forms by the Registrar, the certification of incorporation will be issued to the company.

5. What are annual compliances to be made by a section 8 company

Post incorporation, a section 8 company is bound to follow all the rules and regulations applicable to a company in India except in cases where any exemption or relaxation available to it. Therefore, every year, section 8 company has to:

Maintain books of account and prepare financial statements for a financial year.
Get the books of account audit from external auditors.
Maintain statutory registers and records.
Conduct a minimum of two board meetings every year.
Get the board report from the board of directors to be attached with financial statements.
Conduct an annual general meeting in a year.
File income tax return for every financial year relevant to the current assessment year.
File annual return in MGT-7.
Disclosure of interest by every director in the first board meeting of every financial year.
Spend the two per cent profits classifying them as CSR expenditure in case its profit exceeds INR 5 crore or turnover exceeds INR 1000 crore or net worth exceeds INR 500 crore in a financial year.
Event based compliances like filing of MGT-14 on passing of special resolution, etc.
Other compliances pursuant to registration under section 12AA and 80G.

6. What are the exemptions available to a section 8 company

Various exemptions/ relaxations are provided to a section 8 company in rules and regulations of the Companies Act, 2013. The list is enumerated as under:

Section 8 company is not required to add ‘Private Limited’ or ‘Limited’ in its name.
Flexibility is provided to the Board by predetermining the date, time and place of Annual General Meeting if the shareholders have given directions to the board to this effect in the general meeting.
Time limit of giving notice of a general meeting in case of a section 8 company can be 14 days. Otherwise, notice period is required to serve clear 21 days.
Number of directors can be increased beyond 15 without passing a special resolution in case of a section 8 company.
Independent directors are not required to be appointed in case of a section 8 company.
Any person holding more than 20 directorships is allowed to be a director in a section 8 company.
A section 8 company is not required to appoint a Company Secretary.
There is no requirement to create a nomination and remuneration committee in a section 8 company.
Board of directors of a section 8 company is allowed to pass matters relating to borrowing money, investing funds or granting loan or giving guarantee or security in respect of loan through circulation.
Interested directors in a contract or arrangement can participate in meetings if the value of such contract or arrangement does not exceed 1 lakh.
A section 8 company in which 26% or more of paid-up share capital is held by the central government or one or more state governments or both, may give interest-free loan for funding industrial R&D projects in furtherance of its objectives as stated in its MOA.

7. What are the consequences of violation of provisions by section 8 company

Two types of consequences will occur on violation of provisions, one is facing penalty and another one revocation of licence.

Licence of section 8 company will be revoked in case objectives are conducted fraudulently or objectives are violated.

On making defaults in compliances of the provisions of the Companies Act, 2013,-

The company will face fine of INR 10 lakh which may extend to INR 1 crore ; and

The directors and the officers of the company will have to bear a fine of INR 25,000 which may extend to INR 25 lakh.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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