Setting up a Section 8 Company in India

As per the Companies Act, 2013, Section 8 companies are those companies whose aim is not to earn profits. Section 8 Companies are considered as Non-Profit Organization.

Section 8 Companies focus on promoting commerce, art, science, education, research, sports, charity, religion, environmental protection, social welfare or other similar activities goals.

A Section 8 company enjoys the privileges and benefits of a limited company without adding to its name “limited” or “private limited”, as the case may be.

Benefits of setting up a Section 8 Company:

• No minimum Capital Requirement: There is no minimum capital requirement to set up a Section 8 Company in India.
• Tax Benefits: A Section 8 company enjoys tax benefits under 80G of the Income Tax Act, 1961. The Company Auditor’s Report Order (CARO) is not applicable to Section 8 company.
• No Stamp Duty: For Setting up of a Section 8 company in India, unlike private limited companies, no stamp duty is imposed.
• Separate Legal Identity: Companies of section 8 have noticeable legal identity separate from their members.
• Credibility: Companies in Section 8 are more trustworthy and reliable than any other type of non-profit making organization. Their regulation is under the provisions of the Act; thus they are required to have mandatory audits annually and the Memorandum of Association cannot be changed relating to the non-profit objectives of the company.
• Limited liability: The members of Section 8 company hold limited liability based on the share subscribed by them. They are not liable personally for the losses of the company.
• Exemption to the donors: Under section 12A and 80G of the Income Tax Act, 1961, the tax exemption is provided to the donations received by the section 8 company.

Eligibility Criteria for setting up a Section 8 Company

• There are a minimum of 2 directors and 2 shareholders to proceed with the Section 8 Company registration.
• A company, individual, or Hindu Undivided Family can proceed with the Section 8 company registration.
• A minimum of one director must be residing in India.
• The purpose of the entity must be any of the advancing business, arts, science, sports, education, research, social welfare, religion, charity, the environment, or any other similar goals.
• Any kind of profit, dividend, or donation must only be used to meet the objectives of the organization and not to be distributed among the partners.
• The entity must have a detailed plan for meeting the objectives of the next three years.

 

Process & Requirements for Setting up a Section 8 Company in India

Application for the Name Approval from the Central Registration Cell, Registrar of Companies, Ministry of Corporate Affairs

Application for the name of the company shall be approved by the Central Registration Cell, Registrar of Companies, Ministry of Corporate Affairs. The name of Section 8 Company shall include the words Foundation, Forum, Association, Federation, Chambers, Confederation, Council, Electoral Trust, and the like etc. and cannot end with “limited” or “private limited.

 

Obtaining the Digital Signature Certificate

A digital signature certificate is necessary for filing the incorporation and continued compliance documents for a company. Hence, the Digital Signatures Certificate must be obtained for first subscribers and directors of the company.

 

Filing of Spice Form to the Central Registration Cell, Registrar of Companies, Ministry of Corporate Affairs related to Incorporation of a Section 8 Company

After getting the Name Approval from Central Registration Cell, Registrar of Companies, Ministry of Corporate Affairs, incorporation documents shall be file in the Form to incorporate the company. The Incorporation Forms includes the following documents:

• Authorized Share Capital of the Company
• Paid up Share Capital of the Company
• Registered office address of the Company.
• Proof of Registered office address of the Company i.e. NOC from the Landlord and Any one utility Bill i.e. Electricity Bill/Water Bill/Mobile Bill which is not older than two months
• Number of Directors and Shareholders.
• Number of Shares Subscribed by each shareholder.
• Memorandum of Association in Form INC-13 and Articles of Association.
• Declaration in Form INC-14 by CS/CA/CWA in practice, that the draft MOA & AOA have been drawn up in conformity with the provisions of rules made under Section 8.
• Consent to act as Director in Form DIR-2 and any interest in the entities in Foreign National in Form MBP-1.
• Self-declaration by first subscribers in Form INC-9
• Future annual income and expenditure estimate of the company for next three years.
• Declaration by each of the persons making the application in Form INC-15

 

Certificate of Incorporation

After the Approval of the incorporation Forms, the Certificate of Incorporation will be issued by the Central Registration Cell, Registrar of Companies, Ministry of Corporate Affairs.

 

Funding/Donation of Section 8 Company

Companies under Section 8 can accept donations from the public but cannot accumulate capital through deposits. There are various methods that can be used to raise funds such as equity funding, foreign donations, and domestic donations.

• Foreign contributions are permissible only with FCRA registration, which can be applied for three years post registration.
• For immediate foreign contributions, prior permission from the commissioner can be requested.
• Equity funding can be secured by releasing new equity shares at a premium price. Although domestic subsidies have no restrictions, it is important to have an extensive system to prevent money laundering.

FCRA

The foreign Contribution Regulation Act (FCRA) plays an important role in protecting national interest while fostering international collaboration. The act is designed to see the inflow and utilization of foreign contributions for religious purposes, economical, educational, cultural and social purposes.

 

FCRA Compliance

The FCRA requires every individual or NGO seeking to receive foreign donations to:

• Be registered under the Act.
• Be preferably structured as a Trust, Society, or Section 8 Company.
• Have a minimum existence for at least three years at the time of FCRA application.
• Have bank account in the State Bank of India, Delhi for the receipt of foreign funds.
• Utilize these funds solely for the purpose for which they have been received, as stipulated in the Act.
• Grant these registrations to associations that have definite economic, cultural, educational, social and religious programmes.
• Not be fictitious or benami and neither should they be subject to prosecution.

 

Financial Requirements

• Minimum expenditure of INR 10,00,000 over the last three years on stated objectives, excluding administrative costs.
• Submission of audited Income & Expenditure statements for the past three years by a Chartered Accountant.

 

Process for Newly Registered Entities

• Newly registered entities can apply for specific foreign contributions through Prior Permission (PP).
• Approval required for a particular activity, purpose, and source must be obtained from the Ministry of Home Affairs.

Applying for FCRA Registration

Form FC-3 is required to be filled in while applying for FCRA registration. Along with the application, the following documents must also be submitted:

• Self-certified copy of registration certificate/Trust deed of the association.
• Self-attested copy of important pages of Memorandum of Association or Article of Association that states the aim and objectives of the association.
• Activity Report depicting the details of activities during the past three years.
• Required copies of relevant audited statement of accounts for the last three years (Receipt and Payment, Assets and Liabilities, Income and Expenditure) that show the expenditure incurred on aims and objectives of the association and on administrative expenditure.
• The validity of FCRA registration is five years once its granted. An application for renewal of FCRA registration can be made 6 months before the expiration date at https://fcraonline.nic.in/home/index.aspx

 

Documents to be uploaded with the application for grant of registration

Applicants need Aadhar Number & Darpan ID to get FCRA services through online portal. Before filling in the application online, the applicant should have scanned copies of the following documents.

• JPG file of size 50KB of signature of the chief functionary.
• Self-attested copy of important pages of the Memorandum of Association/Article of Association showing the aim and objectives of the association (Size: 5MB). If MOA/Article of Association is not in English/Hindi, a copy translated into English/Hindi must also be uploaded.
• Activity Report of size 3MB indicating details of activities during the last three years.
• Self-certified copy of registration certificate/Trust deed of the association (Size:1MB). If not in English/Hindi, a copy translated into English/Hindi must be uploaded.
• A fee of INR 10,000/- is to be paid online through a payment gateway.
• Copies of relevant audited statement of accounts for the past three years (Assets and Liabilities, Receipt and Payment, Income and Expenditure) clearly reflecting expenditure incurred on aims and objectives of the association and on administrative expenditure (Size: 5MB).
• Affidavit from each office bearer in Proforma AA.

 

Validity

• FCRA registration is valid for only five years after it’s granted.
• Within the six months of the date of expiry of the registration, NGOs should apply for renewal.
• Registration will be canceled if the inquiry finds the statement of application false.