Incorporation of Company with Charitable Objects Limited by Guarantee and not having Share Capital
The provisions for Companies having main object as charity, i.e., not for profits, are mentioned under Section 8 of the Companies Act, 2013, commonly known as Section 8 Companies. The Section 8 Companies was introduced in the Act to promote formation of Companies with charitable objects etc. Section 8 companies have restriction on use of profits and they are permitted to use the profits only for the purpose for which the Company was promoted and there is a prohibition on distribution of dividend. Thus, anyone desirous to work for non-profit purpose can get itself registered under Section 8 of the Companies Act, 2013. Section 8 companies mostly promote the object relating to commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object and any profit earned from promoting such object is to be reinvested.
As per provisions of Rule 8A of the Companies (Incorporation) Rules, 2014, the name of the Company should include the word Foundation, Forum, Association, Federation, Chambers, Confederation, Council, Electoral Trust and the like, etc. Subject to prior approval of the Central Government the word which represent any statutory authority such as board, commission, bureau, state, union, municipal, etc. (more specifically defined in the provisions) shall not form part or combination of the name of the Company whether in English or any other languages depicting the same meaning.
A company can be formed either as a Company Limited by shares or a Company Limited by Guarantee (with or without share capital) or an unlimited Company. A company limited by guarantee not having share capital is typically established for charitable causes or non-profit purposes. Company limited by Guarantee without share capital does not secure working funds or initial capital from its members. Instead, these companies procure the capital via multiple sources such as subscriptions, grant from statutory bodies such Central, State or any other authority, donation from public domain, foreign donations and investment from Foreign Non-profit organization/Charitable Association or Trusts or Government authority, endowments, fees, etc.
In case of Company is limited by guarantee not having share capital, a clause of guarantee is added instead of share capital clause which described about the liability of members of the company, whether limited or unlimited. The Clause states that each member shall contribute toward his obligation which he had undertaken at the time of incorporation. Voting power in Company limited by Guarantee not having share capital is figured out by the guarantee.
Guarantee means a contract to perform the promise or discharge the liability. Guarantors are not liable for repayment against any of the company’s debts. Henceforth, their personal assets remain untouched. They are only accountable to pay the agreed sum as per their guarantee in the Memorandum of Association in the case of the company’s insolvency.
Benefits available for Company incorporated under Section 8:
- Tax benefits are available under section 80G of the Income Tax Act, 1961.
- The donations made towards Section 8 Company by individuals and corporations can also claim tax exemptions.
- No stamp duty is required to be paid as there is no share capital.
Other requirements for incorporation of Company under Section 8:
1. There is a requirement of minimum 3 persons who shall become Directors of the Company.
2. There is a requirement of minimum 7 persons who shall become Members of the Company.
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