Understanding Section 8 Company: Advantages, Requirements, and FAQs

Introduction

A Section 8 Company, also known as a non-profit organization or a not-for-profit organization, is a type of company that is formed for the purpose of promoting social welfare, arts, science, sports, education, research, religion, charity, or any other non-profit objective. Section 8 Companies are regulated by the Companies Act, 2013, and are exempted from paying income tax on their profits. In this blog, we will discuss the features, advantages, and process of incorporating a Section 8 Company.

Features of a Section 8 Company

1. Non-profit objective: The primary objective of a Section 8 Company is to promote social welfare, arts, science, sports, education, research, religion, charity, or any other non-profit objective. The profits earned by the company are utilized for the fulfillment of its objectives and are not distributed among the members.
2. Limited liability: Like any other company, a Section 8 Company also enjoys the benefit of limited liability. The liability of the members is limited to the extent of their shareholding in the company.
3. Perpetual existence: A Section 8 Company has a perpetual existence, which means that it continues to exist even if the members die or resign.
4. Minimum capital requirement: There is no minimum capital requirement for incorporating a Section 8 Company.
5. Restrictions on distribution of profits: The profits earned by a Section 8 Company cannot be distributed among the members. The profits can only be utilized for the fulfillment of the company’s objectives.

Advantages of a Section 8 Company

1. Tax benefits: Section 8 Companies are exempted from paying income tax on their profits if they are registered with the Income Tax Department under Section 12AA of the Income Tax Act, 1961.
2. Funding opportunities: Section 8 Companies are eligible to receive grants and donations from government agencies, private organizations, and individuals.
3. Credibility: Section 8 Companies are considered to be more credible than other non-profit organizations due to their legal status as a registered company.
4. Separate legal entity: A Section 8 Company has a separate legal entity, which means that it can enter into contracts, own property, and sue or be sued in its own name.
5. Easy transfer of ownership: Ownership of a Section 8 Company can be easily transferred by transferring the shares of the company.

Process of incorporating a Section 8 Company

1. Obtain Digital Signature Certificate (DSC) and Director Identification Number (DIN): The first step in incorporating a Section 8 Company is to obtain a DSC and DIN for all the proposed directors of the company.
2. Name reservation: The next step is to apply for name reservation with the Registrar of Companies (ROC). The name of the company should be unique and not similar to the name of any existing company.
3. Memorandum and Articles of Association: Once the name is reserved, the Memorandum and Articles of Association of the company should be drafted and filed with the ROC.
4. Incorporation: After the Memorandum and Articles of Association are approved by the ROC, the company can be incorporated by filing the incorporation documents with the ROC.
5. Apply for PAN and TAN: After the company is incorporated, the PAN and TAN of the company should be applied for.
6. Apply for registration under Section 12AA of the Income Tax Act: If the company wants to avail of the tax benefits available to Section 8 Companies, it should apply for registration with the Income Tax Department under Section 12AA of the Income Tax Act, 1961.

Section 8 Company is a popular choice for individuals and organizations looking to create a lasting impact on society by working towards a social cause. The company structure allows for flexibility in operations, attracts funding and grants, and is a recognized entity in the eyes of the law.

One of the most significant advantages of a Section 8 Company is the availability of tax benefits. Once registered with the Income Tax Department under Section 12AA of the Income Tax Act, 1961, the company is exempted from paying income tax on its profits. Additionally, donors and contributors to the company can avail of tax deductions on their contributions under Section 80G of the Income Tax Act, 1961.

Another advantage of a Section 8 Company is the ease of funding. The company structure allows for the acceptance of grants, donations, and contributions from the government, private organizations, and individuals. The funding can be used for the company’s objectives and can be a significant source of revenue for the company.

Furthermore, a Section 8 Company enjoys a higher level of credibility as compared to other non-profit organizations. The company is a registered entity and is subject to the Companies Act, 2013, which makes it more accountable and transparent in its operations. This level of credibility can help the company in building a positive reputation and in attracting funding and donations from various sources.

The process of incorporating a Section 8 Company is straightforward and can be completed in a few weeks. The company can have a minimum of two directors and can be registered with a share capital of as low as Rs.10,000. However, the Memorandum and Articles of Association must comply with the Companies Act, 2013, and must clearly define the company’s objectives and operations.

Conclusion

In conclusion, a Section 8 Company is an excellent option for individuals and organizations looking to work towards a social cause while enjoying the benefits of a registered entity. The company structure allows for flexibility in operations, attracts funding and grants, and is subject to the Companies Act, 2013, making it more accountable and transparent. The availability of tax benefits and ease of funding make it an attractive option for individuals and organizations looking to make a lasting impact on society.

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