Advantages & Disadvantages - Section 8 Company

What is a Section 8 Company?

As per Section 8 of the Companies Act 2013, a company that has its sole objective of as promoting Education, Art, Sports, Commerce, Social Welfare, Charity, Research, Religion, Environment, Science, and many such similar objects; where the income and profits of the Company gets utilised for the promotion of its objective(s) only; wherein no member receives any part of profit or dividend; such a Company, incorporated to serve the society, by doing charity and not to earn the profit, is known as a Section 8 Company. 

Section 8 Company has Members and Directors, but unlike others, they function more like volunteers and promoters of the Company incorporated for a social cause. The Directors of such companies are mere service providers who participate in the activities of the Company in spreading awareness about the different objectives and goals of the Company and helping the general public. In contrast to public and private companies that require capital to establish the business, Section 8 Company depends upon donations.

Advantages of Section 8 Company Registration

Major advantages of registering a Section 8 Company are as follows:

Capital requirement

For section 8 companies, there isn’t any prescribed minimum capital requirement. Contribution from Members maybe in the form of Capital (if the company has share capital) or as contribution (in case of a guarantee Company). However, at any stage, there could be alteration in the capital structure as required for the company’s growth. Further, there could be direct funding and donations to Section 8 company.

Income Tax benefits

The taxation over section 8 company is on par with other organisations. The profits are taxed @30%.

In case Section 8 company is registered under section 12AA (tax exemption) of the Income Tax Act, then its profits shall be entirely exempted, and no tax will be levied on the company.

Under the Income Tax Act, 1961, the donors to a Section 8 Company may claim 50% rebate against the donations they make. Under Section 80G, it shall be valid for a period of one to three years.

Separate entity

A section 8 company is a separate legal entity and stands distinct from its members. Further, the company also has a perpetual existence.

Benefit from paying stamp duty

Section 8 companies have exemptions from paying the stamp duty required for incorporation as applicable in the case of other business entities such as the private and public company.

Transfer of ownership/title is easy

The title or ownership is easily transferable. Further, the interest and shares of other members of the company are also considered as movable property and easy to transfer. As a result, it’s easy for the members of the company to leave and transfer its ownership to others.

Use of Pvt Ltd or Ltd

Unlike other companies, such as private limited company and public limited company, LLP, etc. where it’s imperative to use the title ‘limited company’ or ‘LLP’ in the end, section 8 companies have exemption from the use of such titles. However, they need to add a suffix such as foundation, association, etc.

More credible

Such companies hold more credibility than other non-profit organizations be it a Society or Trust. Since the licensing is done by the Central Government, the rules are stringent when compared to other companies. Hence, changes in MOA and AOA aren’t possible in any situation or at any stage. 

Disadvantages of registering your company as Section 8

Limitations of Section 8 companies in India are as follows:

The profits earned should only be used for the promotion of the company or satisfying its objectives of encouraging arts, commerce, science, etc. Apart from this, nobody else can claim the profit of the company be it, director or shareholder.

Unlike other companies, the members of the company cannot be appointed to an office of place of profit.

Making changes in the MOA and AOA of the company isn’t possible due to the stringent rules and regulations of the company. This can be counted both in advantages and disadvantages.

Declaring the dividend or distribution of profit among its member is not allowed.

Additionally, except the reimbursement of pocket expenses, reasonable rent on the premises or reasonable interest on lent, no benefit or remuneration shall be paid to its members whether servant or officer of the company.

FCRA Registration for Section 8 Companies for receiving foreign donations

Section 8 Company seeking foreign contributions for the objects specified in the Memorandum of Association for  promoting definite cultural, social, economic, educational or religious programmes require to obtain FCRA registration. It can also receive foreign contribution through “prior permission” route. 

The company must have been in existence for a minimum of three years while making the FCRA application. 

The company should also not have received any foreign contribution prior to that without the Government’s approval. 

The company seeking registration should have spent at least Rs.10,00,000/- over the last three years on its aims and objects, excluding administrative expenditure. Statements of Income & Expenditure, duly audited by Chartered Accountant, for last three years are to be submitted to substantiate that it meets the financial parameter.

FDI and External Commercial Borrowing (ECB) in section 8 companies can be brought in subject to compliance in FEMA guidelines.