BRIEF INTRODUCTION:

India’s social consciousness is deeply engraved with the generosity of social service, which have evidently existed in various forms since ages, like the concept of daana, dakshina, bhiksha etc. There are many different ways through which individuals, companies etc. can help bring wellbeing, prosperity to one’s life as well as society at large. There are innumerable ways for providing social benefits it is not restricted only to single individuals but individual altogether as society at large can contribute and take active part, the most common structures for providing social benefit is forming a Non-Profit Organization such as Trust, Society and Section 8 Companies. These organizations are set up for providing social welfare, hence considered as Not for Profit Organization, this includes schools, colleges, religious organizations, hospitals etc.

One might think, if all the three above specified organization have similar objects, then what is the difference between them ??? how to choose which organization is the best amongst themselves???

Before deciding on various questions as to, how/ which/what, it is important to understand all of them step wise:

BIRD’S – EYE VIEW: 

1. TRUST:

Trust is the first and oldest form of not-for-profit organization, these are regulated as per the provisions given under the Indian Trust Act, 1882. There are several categories of trusts such as; public trusts and private trusts, discretionary & non-discretionary, testamentary & non testamentary etc. Public trust means trust formed for the benefits of public at large, whereas private trust are formed for the benefits of limited number of person limited to some individuals, families etc.

A Private trust comes under the Indian Trust Act, 1882. Whereas the same does not apply to public trust as Indian Trust Act is not valid to the public trust.

Trust can be formed with minimum 2 individuals, no statutory requirement for annual return/ documents filling, hence is easy to form and operate. But, as there is no regulatory oversight, it is difficult to wind up the trust, as trust are generally irrevocable, however according to the trust deed can be wound up.

Comparative Analysis of Trusts, Societies & Section 8 Companies

2. SOCIETY:

Societies are comparatively considered to be in modern form. Seven individuals from one state/ and Eight individuals in case of different states come together for a common resolution in a general body. They might be Indians or foreigners. More members can be added. Each general body member has one vote. The main instrument of any society are the Memorandum & Bye Laws.

In many states, societies are governed by the Societies Registration Act, 1860 or its versions in force in different states. Governance and public filing vary from each state. Unlike trusts, a society has a more democratic set up with membership and an elected body to manage the society. In general, every society has to file a list of governing body members every year. Some states ask for the audited accounts filing also. This form generally works best for individuals with state-level objectives, who are interested in focusing on their formalities.

3. SECTION 8 COMPANY:

Section 8 companies are governed by Companies Act 2013. The Government grants these companies an exclusive license under Section 8 Company. These companies can be limited by shares/ guarantee, having/not having share capital. The members of a company who are limited by guarantee are bound by a guarantee in the articles of association of the company, which requires them to pay the company debts up to a fixed sum. There are three main conditions for this.

1)   The company should form for the charitable trust

2)   Income and profits should be used towards these objects

3)   The company should not pay any dividend to its members

Section 8 companies are authorized to undertake micro finance activities wherein small-scale loans of somewhat Rs. 50,000 for rural areas and Rs. 1,25,000 for urban areas are allowed by section 8 companies, it is the simplest way to register a microfinance company, as per RBI circular RBI/2015-16/15 DNBR (PD) CC.No.052/03.10.119/2015-16 Dated July 01 2015, exempted section 8 companies to obtain Certificate of Registration from RBI to carry on any non-banking financial business, but within the limits prescribed by RBI.

COMPARATIVE ANALYSIS:

SL. NO BASIS TRUST SOCIETY SECTION 8 CO.
1 Statute/ Legislation Trust is governed by the Indian Trust Act, 1882. Societies are governed by the Societies Registration Act 1860. Many states, however, have variants on the Act Section 8 Companies are governed by the Indian Companies Act, 2013.
2 Prime Object/ Activities For providing social benefit i.e. Non-Profit Organization’s surplus, cannot be utilized in any other purpose other than fulfilling its objects Same as Trust Same as Trust & Society
3 Nature of Control One Man Control i.e., settlor / founder trustee / board of trustees Decisions are made by voting power Governed by the Board of Directors
4 Jurisdiction Trusts are registered under the jurisdiction of Deputy Registrar / Charity commissioner of the relevant area. The power to register a society lies in the hand of Registrar of societies. The power to register a section 8 Company lies with the Regional Director & Registrar of Companies of concerned state
5 Main documents Trust Deed Memorandum Of Association & Bye Laws Memorandum Of Association and Article of Association
6 Stamp Duty Trust Deed are executed on non-judicial stamp paper (amount varies from state to state) No requirement of stamp papers for Memorandum & Bye laws of society No requirement of stamp papers for Memorandum & Bye laws of society
7 Minimum Requirement. At least two trustees are required to register a public charitable trust In general. Indian citizens serve as trustees, although there is no prohibition against non-natural legal persons or foreigners serving in this capacity. Minimum Seven members are required for formation of state level society and 8 members in case different states members are involved. Minimum 2 directors and shareholders. Directors and Shareholders can be the same person.
8 Area of Activities Applicable to whole of over India no matter from which state trust deed belongs In case society is formed within  particular state with 7 or more members then within that particulars state it is applicable, for all over India with different state 8 or more members has to be present. As registered by central processing center (CPC), applicable all over india
9 Micro Finance Activities Cannot do Cannot do Can undertake micro finance activities
9. Annual compliances/ documentations There are no requirement for any annual compliances Societies must file  annually, list of names, occupations and address of the managing committee members The company must file the annual returns AOC-4, MGT-7 etc and accounts with the ROC.
10. Registration with Income Tax u/s. 12A & 80G as NGO                . At par with society & Section 8 Company. At par with trust & Section 8 Company At par with trust & Society.
11 Borrowings Trusts can borrow only from the Author Can borrow only from its members Can borrow from members/ shareholders and also from banks & institutions
12. From the point of view of Grant of subsidy by the government Moderately preferred Moderately preferred Most preferred
13. Possibility of Amendment Can be done through supplementary trust deed Relatively difficult as both the memorandum & bye laws has to be amended Restricted without approval of CG
14. From the point of view of Foreign Contribution Regulation Act, (FCRA) registration Moderately preferred Moderately preferred Most preferred
15. Foreign Direct Investment FDI in Trusts other than VCF is not permitted. Not Permitted Not Permitted
16. Cost efficiency & Transparency Low Cost & Less Transparent Low Cost & Less Transparent Comparatively Higher Cost & More Transparent
17. Winding- Up Generally irrevocable, hence cannot be easily wound but, as per the trust deed can be wound up Can be wound up if 3/5th members so desire. Can be wound up if shareholders desire (in AGM)

WHAT’S BETTER- TRUSTS, SOCIETIES OR SECTION 8 COMPANIES ??

From the above discussion it is clear that all the organizations i.e. Trusts/ Society/ Section 8 Co. are meant to provide social benefit, relief to poor’s and providing social welfare to society at large, they cannot do any other work apart from providing social benefits and what is prescribed in the main documents, the surplus from their business cannot be applied in any other object, i.e. Non-Profit Organization.

There is no evident particular situation under which one can choose what to form, like in case of providing social benefit to one individual/family (in case of private trust) or to society at large (in case of public trust) wherein it can be properly managed, the trustee to hold office for his or her lifetime without the need for an election. Privacy in activity as well as flexibility in the division of benefits.

Now, in case if person wants more organized, structural way managed through elected bodies to provide social benefits to public at large then formation of societies is the ideal choice.

If one desires to provide social welfare as a legal structure of a company, to gain reliability and credibility as it is an approved establishment by the central government, with no requirement of higher, more benefits of government subsidies, foreign contribution, more transparency.

If one is of the view to do any micro finance business but not as a part of NBFC, then solely section 8 company is the best as Section 8 companies are authorized to undertake micro finance activities wherein small-scale loans of somewhat Rs. 50,000 for rural areas and Rs. 1,25,000 for urban areas are allowed by section 8 companies, it is the simplest way to register a microfinance company, as per RBI circular RBI/2015-16/15 DNBR (PD) CC.No.052/03.10.119/2015-16 Dated July 01 2015, exempted section 8 companies to obtain Certificate of Registration from RBI to carry on any non-banking financial business, but within the limits prescribed by RBI.

Hence, it is evident from the above discussion that there is no specific criteria thactt one must follow to decide which Not- for- profit organization is better, every organization is best at their parts, and if one desires to engage itself in micro finance activities then section 8 company is the best as this facility is not granted in trusts/ societies.

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Company: Mahata Agarwal & Associates
Location: Kolkata, West Bengal, India
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