A Section 8 Company is a type of organisation recognised by Section 8 of the Companies Act, 2013. This kind of company is established for charitable and non-profit objectives and it dedicates all its income and profits towards the furtherance of its objectives.
Section 8 companies are generally preferred by people who want to conduct charitable activities because they provide numerous advantages such as limited liability, no minimum capital requirements, tax exemptions and several other privileges.
However, Section 8 companies also have some disadvantages like their members cannot get any dividend and their officers and directors do not get benefits and allowances.
Features of a Section 8 Company
Section 8 companies are distinct from other types of companies and have the following features:
Charitable Objectives
Section 8 companies aim to promote fields of arts, commerce, science, research, education, sports, charity, social welfare, religion, environment protection or other similar objectives. They do not aim to make profits and their objectives are purely charitable.
No Minimum Share Capital
Unlike all other companies, Section 8 companies do not require any prescribed minimum paid-up share capital.
Limited Liability
Members of Section 8 companies can only have limited liability. Their liabilities cannot be unlimited in any case.
Government Licence
Such companies can function only if they have the Central Government’s licence. The Government can revoke this licence as well.
Privileges
Since Section 8 companies possess charitable objectives, the Companies Act has accorded several benefits and exemptions to them.
Firms as Members
Apart from individuals and associations of persons, Section 8 also allows firms to be members of these companies.
Registration of Section 8 Company
To form a Section 8 company, a person or an association of persons needs to make an application to the Registrar of Companies using the requisite forms. If the Central Government is satisfied, it can accept the application upon any terms and conditions imposed under the licence granted by it. Once accepted, the Registrar of Companies will register the company after the applicants pay all requisite fees.
It is important to note that Section 8 companies can only be limited companies and all privileges and obligations of limited companies apply in this case. Further, these companies also do not need to include the words “Limited” or “Private Limited” in their names, as all other companies have to.
Since the existence of such companies is based on the licence granted to them, they cannot even alter their memorandum or articles of association without the Central Government’s permission. They also cannot do anything that the licence disallows.
Cancellation of Section 8 Company Licence
Section 8 companies require a grant of a licence by the Central Government. All such licences are revocable as well on the following grounds:
- The company contravenes the provisions of Section 8.
- The terms of the licence are violated.
- When its conduct is fraudulent or it violates its own objectives and public policy.
- The Government can even order the company to be wound up or amalgamated with another similar company under certain circumstances. The Government has to hear the company before passing such orders.
Closing of Section 8 Company
Section 8 companies can wind up or dissolve themselves either voluntarily or under orders given by the Central Government. If any assets remain after the satisfaction of debts and liabilities upon such winding-up, the National Company Law Tribunal can order the transfer of these assets to a similar company. It can also order that they must be sold and the proceeds of this sale should be credited to the Insolvency and Bankruptcy Fund.
Punishment for Contravention
According to Section 8 of the Companies Act, 2013, any company that violates its provisions is punishable with a fine ranging from Rs. 10 lakhs to Rs. 1 crore. Moreover, the officers and directors of the company can face imprisonment for up to three years and a fine ranging from Rs. 25,000 to Rs. 25 lakhs. The act also mentions that if any officer conducts affairs with fraudulent motives, they can be prosecuted under the stringent provisions of Section 447, dealing with fraud.
Advantages of Section 8 Company
Section 8 companies have become a preferred choice for people who wish to undertake charitable activities rather than traditional NGOs and associations. Here are some advantages of Section 8 companies:
Limited Liability
Members of the company have limited liability and their assets cannot be used to pay the company's debts.
No Minimum Capital Requirements
Unlike other types of companies, Section 8 companies do not require a minimum capital investment.
Tax Exemptions
Section 8 companies can avail themselves of several tax exemptions under the Income Tax Act, of 1961.
Lower Fees
These companies do not have to pay stamp duties and high fees for registration.
Separate Legal Status and Perpetual Existence
Section 8 companies have separate legal statuses and perpetual existence, which means that the company can continue to function even if its members change.
Exemptions from Compliance
They are exempted from carrying out several procedural compliances that other companies must adhere to.
More Credibility
Section 8 companies have more credibility than NGOs, societies and trusts because they are recognised by the Central Government's licence.
Disadvantages of Section 8 Company
Despite numerous benefits, Section 8 companies have the following drawbacks:
No Dividend for Members
Members of the company cannot receive any dividends.
No Benefits and Allowances for Officers and Directors
Officers and directors of the company do not receive any benefits or allowances.
Restricted Use of Profits
The profits earned by the company can only be used for furthering charitable aims and objectives.
Central Government's Permission Required
Any amendments to the memorandum and articles of the company require permission from the Central Government.
Revocable Licence
The licence granted to Section 8 companies is revocable on several grounds.
Conclusion
Section 8 companies have numerous benefits, such as limited liability, tax exemptions and credibility. However, they also have drawbacks, such as restrictions on the use of profits, no dividends for members and limited benefits for officers and directors. For more details, connect with our experts at StartupFino.
Author Bio
