Not-for-Profit Companies: Legal Framework

Abstract: In a nation where social initiatives hold paramount importance; the concept of not-for-profit organisations has emerged as a powerful instrument for driving positive transformation. This article delves into the fundamental aspects of not-for-profit companies elucidating their purpose, key features, authorized activities, benefits, and their distinctive role in promoting social welfare. By examining recent legislative developments and exploring the core attributes of not-for-profit companies, this article aims to shed light on their significance in the broader societal context.

Introduction: India’s economy is intrinsically connected to its social fabric. As the nation evolves, ensuring the well-being of its citizens remains a priority. The role of finance and legal professionals in advocating for social upliftment is crucial. In this vein, the concept of not-for-profit companies has gained prominence. This article endeavours to provide insights into the foundational elements of not-for-profit companies, demonstrating their relevance in driving positive social change.

Understanding not-for-profit companies: Section 8 of the Companies Act, 2013, discusses associations and not-for-profit organisations. The companies under this Section are commonly known as ‘Section 8 companies’ and are made for a charitable purpose rather than to earn profit. Section 8 companies enjoy certain benefits under the Companies Act and are exempted from certain compliances.

A Section 8 company can be defined as a legally recognized entity with a focus on advancing charitable, educational, scientific, religious, or other socially beneficial objectives. Comprising people with shared altruistic goals, a Section 8 company is structured to channel its resources towards the betterment of society. A Section 8 company can be established by individuals or Companies or association or body of individuals or a combination thereof.

It is important to note that by virtue of provisions of section 8(3), even a partnership firm can be a member of Section 8 Company.
The central aim of such companies is to facilitate the formation of organizations with altruistic intent while also enabling the conversion of existing entities into Section 8 companies.

Prerequisites for a Section 8 company: Central Government, through appropriate authority, may issue licence allowing any person or association of persons to be registered Section 8 company only if it complies with following three conditions –

1. The company must promote trade, art, science, sports, education, research, social welfare, religion, charity, environmental protection, or any other such object.

2. The company intends to apply its profits, if any, or other income in promoting its objects; and

3. The company intends to prohibit the distribution of any dividends to its members.

Unique Features:

• Given that Section 8 companies focus on social welfare, they often require financial assistance. The Companies Act of 1956 accommodates these needs by enabling Section 8 companies to provide financial support to their members through credit facilities, loans, advances, and partnerships with organizations like NABARD.
• A section 8 Company shall not alter the provisions of its memorandum or articles except with the prior approval of the Central Government.
• A section 8 company shall amalgamate only with another section 8 company and having similar objects.
• The section 8 company shall enjoy all the privileges and be subject to all the obligations of limited companies.
• A firm may be a member of the section 8 company.
• Although Section 8 companies are themselves involved in charitable work, they are also required to perform their corporate social responsibility. As per the Corporate Laws Committee Report, Section 135 applies to every company, including Section 8 companies. The company must spend on a cause different from that in which it is already engaged. The expenditures for corporate social responsibility must not be for the benefit of such company or its employees.
• Section 8 Companies enjoy limited liability even without adding the words “Limited” or “Private Limited”.
• As per rule 8(7) of the Companies (Incorporation) Rules, 2014, for the Companies under Section 8 of the Act, the name shall include the words foundation, Forum, Association, Federation, Chambers, Confederation, council, Electoral trust and the like etc.
• As per proviso to section 2(85), a Section 8 Company cannot be treated as a small company.

Exemptions under Companies Act, 2013:

• Board of Directors of Section 8 companies shall hold at least one meeting within every six calendar months.
• The quorum for a meeting of the Board of Directors of a company shall be either eight members or twenty-five per cent, of its total strength whichever is less.
• Unlike other companies wherein meetings must be held during business hours only and never on a national holiday, such companies are allowed to hold meetings before or after business hours and even on a national holiday. The board of directors must decide the date, time, and place beforehand.
• A general meeting of a Section 8 company may be called by giving not less than clear 14 days’ notice instead of 21 days’ notice.
• Section 8 companies are not bound to prepare the minutes of their meetings as per Section 118 of the Companies Act, 2013. However, the minutes must be recorded within 30 days of the meetings when articles of association provide so.
• Provisions relating to appointment of a maximum and minimum number of directors or appointment of independent directors as provided in section 149 do not apply on section 8 Companies.
• Section 165 (1) of the Companies Act, 2013, providing for maximum number of directorships a person can hold in companies at the same time does not apply on Section 8 Companies.
• It is not mandatory for section 8 companies to appoint any Key Managerial Personnel including Company Secretary.
• The definition of “Company Secretary” as provided in of clause (24) of section 2 does not apply on the Section 8 Company. Thus, any person being appointed as Company secretary of a Section 8 Company need not to be a company secretary as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980.

The Board of Directors of a Section 8 company may exercise the following powers on behalf of the company by means of a resolution by circulation, namely: —

1. to borrow monies.

2. to invest the funds of the company.

3. to grant loans or give guarantee or provide security in respect of loans.

• The audit committee of Section 8 Company need not have an independent director. As per section 177(2), Audit Committee of Section 8 Companies shall consist of minimum 3 directors. Further, its proviso requires majority of members including the Chairperson with the ability to read and understand financial statements.
• Section 8 Companies need not constitute a nomination and remuneration committee and stakeholder’s relationship committee, which are otherwise prescribed under Section 178 of the Companies Act, 2013.

Exemptions under Income tax Act, 1961:

The Income Tax Act, 1961, recognizes the vital role played by charitable organizations in fostering social welfare and development. Section 12AA of the Act outlines the criteria and procedures for registration and tax exemption for such entities. Section 8 Companies seeking tax benefits and exemptions must apply to the Commissioner of Income Tax (Exemptions) for obtaining registration as a charitable organization under the Income Tax Act in accordance with the Section 12AA of the Income Tax Act, 1961.

Upon obtaining registration under Section 12AA, a charitable organization becomes eligible for certain tax exemptions, as outlined in Sections 11, 12, 12A, and 13 of the Income Tax Act.

Conclusion: Section 8 companies are one of the many companies mentioned under the Companies Act, 2013. These not-for-profit organisations stand as beacons of positive change within India’s socio-economic landscape and are thus very important for the purpose of philanthropy.

By fostering an environment where social initiatives can flourish, these entities catalyse transformation and serve as instruments of upliftment. The interplay of legal provisions, financial mechanisms, and societal objectives defines the journey of Section 8 companies, reaffirming their role as catalysts for holistic progress.