Business Registration Options For Crowd Funding

SECTION 8 COMPANY FORMATION- Non-Profit Organization

Section 8 Company is Company formed with the objective of promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object. It is established majorly for charitable or not-for-profit purposes.

Features

• Section 8 Company does not require a prescribed minimum paid-up share capital.
• Liabilities of the members of Section 8 Company are limited to their capital contributions.
• Section 8 Companies enjoy more credibility as compared to NGOs, societies and trusts because they are recognized by Central Government’s licence.
• Section 8 Company is exempted for the payment of stamp duty applicable for registration as applicable in case of other structures such as private limited or a public limited company.
• Section 8 company can apply for exemption u/s 12AA of the Income Tax Act. It is also eligible for registration u/s 80G of the Income Tax Act.
• Section 8 company can receive the foreign contributions after getting itself registered under Foreign Contribution (Regulation) Act, (FCRA), 2010.

Section 8 company are not allowed to raise funds by way of deposits, but they can accept donations from the public. Below are the ways by which it can raise funding:

• Foreign Donations: Foreign donations are allowed only when FCRA registration has been taken. FCRA license can only be applied after three years from the date of registration. However, if it is urgent to receive foreign donations, then you may apply for prior permission from commissioner.
• Equity Funding: Section 8 company can also raise funding by issuing new equity shares at a higher value.
• Domestic donations: There is no restriction on the domestic donations, however a proper check must be kept avoiding the money laundering cases.

Benefits of Section 12A & 12AA registration:

• Income will be exempted from taxation.
• Benefits in taking grants from government / abroad / other agencies.
• Benefits in FCRA registration.’

CROWDFUNDING

RBI defines Crowdfunding as “Solicitation of funds from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause.”

Presently, raising funds in India by a Company is governed by the provisions of Companies Act,2013, Securities Exchange Board of India Act 1992, Securities Contracts (Regulation) Act, 1956, Depositories Act, 1996.

In India Equity Crowdfunding is Illegal, but reward crowdfunding is Legal.

To issue equity shares in India, companies need to comply with the provisions of The Companies Act,2013.

To regulate Crowdfunding in India it is important that the following are established:

• The investors that are allowed to invest through the crowdfunding platforms,
• The types of entities that are allowed to raise funds through this channel and the disclosure requirements,
• The types of entities that are allowed to set up internet-based Crowdfunding Platforms to enable online solicitation from such investors, and the different associated aspects.

Pure Donation-Based Crowdfunding (where issuers directly seek a donation from the grantors), Reward-Based Crowdfunding (where issuers directly offer rewards like movie tickets, new computer game, download of a book, etc.) and Peer-to-Peer lending do not fall within the regulatory purview of SEBI, as they do not generally involve issuance of securities for financial return, and may require authorization from other regulators.

Trust, Society and Section 8 Company

Trust, Society and Section 8 Company can seek registration Under Section 12A of Income Tax Act to claim exemption under Income Tax Act’ 1961, if certain conditions are satisfied. Section 12A deals with registration of trust and Section 12AA deals with online procedure for registration of trust.

A Non-Governmental Organization (NGO) that is neither a part of a government nor a conventional for-profit business. Usually set up by ordinary citizens, NGOs may be funded by governments, foundations, businesses, or private persons. NGOs are highly diverse groups of organizations engaged in a wide range of activities and take different forms in different parts of the world. Some may have charitable status, while others may be registered for tax exemption based on recognition of social purposes. Others may be fronts for political, religious, or other interest groups.

Trust v/s Sec 8 Company- A Comparison