The income of NPO can’t be used for paying out dividends to the company’s members and has to be for the promotion of charitable objectives. Such companies obtain an incorporation certificate from the central government and are liable to adhere to the rules specified by the government.
According to the rules, failure to comply with the responsibilities stated by the Central Government may lead to the winding up of the company on the orders of government. Besides, strict legal action will be taken against all the members of the company if the objectives laid down by the company proves to be bogus.
Its
manner of carrying out the operation is similar to any other limited company
and even the right & duties of a limited company and NPO are alike.
However, the title of “Section 8” and “Limited” can not be interchanged.
Companies
registered under Section 8, Company Act 2013 has their privileges in
the account of their non-profit mode of operations. Certain disadvantages as
well. They are listed below.
Advantages:
· Section 8 Companies do not require a minimum paid-up share capital like other companies.
· Members of the company are only allotted a limited liability. Protection of personal assets in case of any discrepancy by the law is an advantage.
· Numerous Tax exemptions are applicable.
· Central Government’s license offers greater credibility than NGOs, trusts and societies.
· It is optional for the company to use suffixes such as Pvt Ltd or Ltd.
· No stamp duty during registration.
·
Rather
than individuals, a Firm can also be a member of the company
Disadvantages:
· Members are not allowed to take/share profits.
· Amendments to the memorandum and articles shall not be done without permission from the government
· Income tax rates are the same as the other companies.
· Cancellation of the license is possible at several grounds.
An individual or an association of individuals are eligible to be registered as Section 8 Company if it holds below-mentioned intentions or objectives. The objectives have to be confirmed to the satisfaction of the Central Government.
When the company intends to promote science, commerce, education, art, sports, research, religion, charity, social welfare, protection of the environment or alike other objectives;
When the company holds an intention to invest all the profits (if any) or any other income generated after incorporation in the promotion of such objects only;
When
the company does not intend to pay any dividend to its members.
Companies
(Incorporation) Sixth Amendment Rules, 2019 dated 7th June 2019 to
ease the Incorporation process has knocked off the need for filing Form no. INC
12, which was initially needed.
This amendment has made the Process of Incorporation of Section 8 Companies as
easy & simple as that of other companies.
Section
8 Companies can be incorporated by reserving names in part A of Spice+ followed
part B of Spice+ form or by directly filing Spice+. License No. shall be given
to section 8 company during the incorporation.
Stakeholders
having License Numbers already before the filing of SPICe form may file the
form as per their ease. However, one thing should be noted that form processing
takes time to let the workflow changes to be effective.
Section 149(1) of the Companies Act
2013 –
prescribed minimum of 3 & 2 directors for public limited & private
limited company respectively and a maximum of 15 directors.
But there is no minimum or maximum prescription for section 8 company.
The second proviso to section 149(1) – prescribes a woman director in
a specified class of companies.
Section 149(3) of the Companies Act
2013 –
prescribes resident director in every company.
Section 165 of the Companies Act, 2013 – says Directorship in Section 8
Companies will not be summed up when the total number of directorships will be
calculated i.e. it will not be counting while adhering to the maximum limit of
twenty Directorship as prescribed in the Act.
Section 149(1) of the Companies Act,
2013 –
vide exemption notification dated June 05, 2016 stated that Section 8 Companies
are not under obligation to appoint an independent director and are free from
all the consequential provisions concerned with Independent directors.
Under Section 149(3) – Section 8 company must have a
minimum of one Resident Director i.e. a director who has resided in India at
least for a total period of 182 days (one hundred and eighty-two days) or more
within the previous calendar year.
As per the exemption notification read with section 173(1) and 174(1), Section 8 companies must have at least one meeting within a period of 6 calendar months and the quorum for its board meetings is 8 directors or 1/4th of its total strength, whichever is less, respectively. However, the quorum should have a minimum of at least two members.