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What Are The Section 8 Companies in India?

A Section 8 companies are a special category of companies registered under the Companies Act, 2013, in India formed with the objective of promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, or any other objective, without the intention of earning profits (Section 8(1)(a) to (c)). 

The primary reason for forming a Section 8 company is to channel funds towards social causes while ensuring compliance with corporate governance regulations. Therefore, these companies do not distribute dividends to their members and instead reinvest profits to achieve their objectives. They are crucial for non-profit organizations (“NPO”) seeking legal recognition and benefits under Indian law. 

These companies are important as they provide a credible, transparent, and legally structured way of conducting non-profit activities. Reliance Foundation, TATA Foundation, Wipro Foundation, Federation of Indian Chambers of Commerce and Industry (“FICCI”), are some known Section 8 companies operating in India.

Also Learn: 7 Proven Strategies for Tax Planning For Corporates

How Section 8 companies are different from other companies?

Unlike trusts and societies, Section 8 Companies are governed by the Ministry of Corporate Affairs (“MCA”) and have a more structured compliance framework.

In comparison to Private and Public limited Companies, Section 8 Companies differ primarily in their objective and profit utilization. They aim to earn profits for distribution among shareholders, Section 8 companies reinvest all profits towards achieving their social or charitable objectives. Therefore, Section 8 companies cannot go public or list shares on stock exchanges, as this would conflict with their non-profit status.

Per Rule 8(7), Section 8 company names must include descriptive terms such as Foundation, Forum, Association, Federation, Chambers, Confederation, Council, Electoral Trust, or similar words that reflect their non-profit nature and organizational purpose.

Further, instead of traditional equity funding, Section 8 companies typically rely on Donations and grants, CSR contributions from other companies, Service fees and program revenues, Government funding, foreign contributions (with FCRA approval), Membership fees and Interest from investments.

Lastly, as a privilege to their status, Section 8 Companies benefit from various regulatory and tax exemptions.  

Below summarized are some key differences:

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What documents are required to open Section 8 companies?

To register a Section 8 Company, the following documents are required:

1. Director’s documents:

• PAN Card (Mandatory for Indian directors)
• Aadhaar Card or Voter ID or Passport
• Passport (Mandatory for Foreign directors)
• Latest Utility Bill (Electricity/Water/Gas) for Address proof
• Passport-sized photographs

2. Registered office address proof:

• Rent Agreement (If the office is rented)
• NOC (No Objection Certificate) from the owner
• Electricity Bill / Property Tax Receipt

3. Memorandum of Association (“MOA”) and Articles of Association (“AOA”):

• MOA (Defines the objective of the company)
• AOA (Defines the operating structure)

4. Declarations and regulatory approvals:

• INC-14: Declaration by a practicing Company Secretary (“CS”), Chartered Accountant (“CA”), or Cost Accountant
• INC-15: Declaration by each director that the company will comply with Section 8 regulations
• Digital Signature Certificate (“DSC”) of directors
• Director Identification Number (“DIN”) of proposed directors

How to form a Section 8 company?

The process of registering a Section 8 Company involves several steps:

Rule 19: Applicable for registering a new company under Section 8

Step 1: Obtain digital signature certificate (“DSC”)

The first step is to obtain DSC for all proposed directors. This is required to file electronic forms with the MCA.

Step 2: Apply for director identification number (“DIN”)

A DIN is required for all directors, which can be applied for within the SPICe+ (INC-32) form during the incorporation process.

Step 3: Name reservation

The company’s name must be reserved using the SPICe+ (Part A) form. The name should comply with Section 8 regulations and should not contain “Private Limited” or “Limited.”

Step 4: Draft MOA and AOA

Prepare the MOA and AOA, ensuring they reflect the non-profit objectives of the company.

Step 5: File SPICe+ (Part B) and INC-32 form

Complete the incorporation application by filing the SPICe+ INC-32 form, which includes:

• e-Memorandum of Association (e-MOA)
• e-Articles of Association (e-AOA)
• Declaration in Form INC-14 by a practicing professional (CA/CS/CWA)
• Declaration by each subscriber and director in Form INC-15
• Other relevant attachments as required

This submission is done online through the MCA portal; physical copies are generally not required unless specifically requested by the Registrar of Companies (“ROC”).

Step 6: Obtain license under Section 8

Upon satisfactory review, the Central Government will issue a license in Form INC-16, granting permission to operate as a Section 8 Company.

Step 7: Certificate of Incorporation

After obtaining the license, the ROC will issue the Certificate of Incorporation, officially recognizing the entity as a Section 8 Company.

Rule 20: Applicable for converting an existing company to a Section 8 company

The conversion of an existing company into a Section 8 Company involves additional steps to ensure compliance with regulatory requirements.

Step 1: Board resolution

Convene a Board Meeting to pass a resolution approving the proposal to convert the company into a Section 8 Company.

Step 2: Apply for name approval

Submit an application for name approval through the RUN (Reserve Unique Name) service on the MCA portal, ensuring the proposed name reflects the charitable objectives.

Step 3: Draft revised MOA and AOA

Amend the existing MOA and AOA to align with Section 8 requirements, emphasizing non-profit objectives.

Step 4: File application in Form INC-12

Submit Form INC-12 to the ROC, accompanied by:

• Draft MOA and AOA
• Declarations in Forms INC-14 and INC-15
• Financial statements and audit reports of the preceding two years
• Statement of assets and liabilities, not older than 30 days from the application date
• Certified copy of Board and General Meeting resolutions approving the conversion

Step 5: Public notice

Within a week of submitting the application, publish a notice in Form INC-26 in one English and one vernacular newspaper circulating in the district of the registered office, inviting objections or suggestions within 30 days.

Step 6: Obtain license under Section 8

After considering any objections and ensuring compliance, the Central Government may grant the license in Form INC-16 or INC-17.

Step 7: Certificate of Incorporation

Upon receipt of the license, the ROC will issue a new Certificate of Incorporation, confirming the company's status as a Section 8 Company.

Also Learn: What is a Limited Liability Partnership or LLP

What are the benefits and drawbacks of Section 8 company?

Benefits:

• Tax exemptions: Eligible for 80G & 12A/12AA/12AB benefits under Income Tax Act, reducing tax liability. Also, certain services provided by Section 8 companies are exempt from GST
• Limited liability: Directors’ liability is limited to the company’s assets.
• Separate legal entity: Section 8 companies can own assets, sue, and be sued in their own name.
• Credibility: High trust factor due to MCA regulation.
• Foreign donations: Allowed under FCRA approval.

Drawbacks:

• Strict compliance: Annual filings and audits are mandatory.
• No profit distribution: All earnings must be reinvested into the company.
• Higher formation costs: Compared to trusts or societies.
• Limited fundraising: Cannot raise capital through equity shares.

Also Learn: An Ultimate Guide to OPC (One Person Company)

Conclusion

A Section 8 Company is an ideal structure for organizations dedicated to social causes while ensuring corporate governance and transparency. While it offers significant tax benefits and credibility, it also comes with strict compliance requirements. Understanding the registration process and compliance obligations can help in the seamless formation of a Section 8 Company.

Would you like assistance with forming your Section 8 Company? Let FileAbhi know, and our experts will guide you through the process!

Frequently asked questions (“FAQs”) on Section 8 companies in India

1. Can we form a private limited company under Section 8?

Yes, a Section 8 Company can be either Private or Public, but it cannot use “Private Limited” or “Limited” in its name. The main requirement is that its profits must be utilized for social objectives.

2. How much time does it take to form a Section 8 company?

The entire registration process takes 15 to 30 days, depending on document verification and MCA approvals.

3. How to apply for Section 8 company?

To apply, one must submit an online application through the MCA portal using the SPICe+ (INC-32) form, along with necessary approvals and declarations.