Section 8 Company: Registration Process, Eligibility, & Benefits

Section 8 businesses prioritize social welfare while operating under the Companies Act of 2013. They channel all income into initiatives like education, healthcare, and environmental protection. These companies benefit from tax exemptions and limited liability, which makes them attractive to social entrepreneurs. When a company is registered under Section 8, it gets legal recognition, which, in turn, helps to enhance credibility with donors and stakeholders. In this article, we will learn how to register a Section 8 company, eligibility criteria, and more.

What is Section 8 Company?

A Section 8 company refers to a non-profit organisation whose focus is to promote charitable, educational, or social objectives. Any income or surplus generated is strictly reinvested to advance these objectives and is not distributed among its members. This structure ensures that the organisation's resources are dedicated solely to its mission.

According to Section 8(1) of the Companies Act 2013, a company may be established to promote commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, or any other object. It must apply its profits or income towards the promotion of its objectives. It is strictly prohibited to distribute its profit among its members.

Key Features of a Section 8 Company

Listed below are the key features of a Section 8 company:

1. Non-Profit Objective

The primary aim of a Section 8 company is to promote charitable objectives such as education, social welfare, and environmental protection. These types of companies do not have any profit motive. Their sole focus is to make advancements for their stated purposes.?

2. Prohibition on Profit Distribution

It is strictly prohibited for these companies to distribute their profits or dividends to their members. Any income generated must be reinvested to further the company's objectives, which ensures that resources are dedicated to their intended charitable purposes.?

3. Limited Liability

Members of a Section 8 company are protected from unlimited liability. This means their financial responsibility is limited to the amount of their shareholding or guarantee. They will not be held personally responsible for the debts of the business.

4. Government License

A Section 8 company can only operate if it obtains a license from the central government. This license is essential for starting a Section 8 company and can be revoked if the company doesn't follow the prescribed rules.

5. Privileges

Section 8 companies are set up with social welfare or charitable objectives. Due to their nonprofit nature, they enjoy several benefits and exemptions under the Companies Act, such as tax exemptions and fewer compliance requirements.

Eligibility Criteria for Forming a Section 8 Company

The following requirements must be fulfilled to form a Section 8 company under the Companies Act of 2013: 

1. Charitable Objectives: The company should clearly state there objective in the company’s Memorandum of Association and must not be for profit-making purposes. The objective of the company is listed below:

• Commerce
• Art
• Science
• Sports
• Education
• Research
• Social welfare
• Religion
• Charity
• Environmental protection?

2. Application of Income: Any income or profits that the company generates must be applied solely towards promoting its charitable objectives. The company is prohibited from distributing dividends or profits to its members.?
3. Minimum Number of Members and Directors: The minimum number of members and directors depends on the type of company. Here is a detailed list of the minimum number of members and directors depending on the type of company:

• Private Limited Company: In case the Section 8 Company is a private limited company, it requires at least two members and two directors to be eligible to register themselves under this category.
• Public Limited Company: If the company is a public limited company, it needs at least seven members and three directors to become eligible to register as a section 8 company.

4. Management Team: The Board of Directors manages the company, whose responsibilities and powers are defined in the company’s Memorandum of Association (MoA) and Articles of Association (AoA).
5. Income Tax Compliance: Section 8 companies must follow the Income Tax Act. These companies may be eligible for certain tax exemptions, but they still need to comply with filing tax returns. It also helps to maintain transparency in their financial activities.
6. GST registration: If the section 8 company’s annual turnover exceeds the prescribed limit, it must register for Goods and Services Tax (GST) and comply with all applicable GST rules.

Documents Required for Section 8 Company Registration in India:

Listed below are the documents that a Section 8 company requires to register itself under the Companies Act:

1. Identity and Address Proof of the director and members

Listed below are the documents required as identity and address proof of the directors and members:

• Identity Proof:
  • PAN Card (mandatory)
  • Aadhaar Card
  • Passport
  • Voter ID
• Address Proof:

• Utility bills (electricity, water, or gas) not older than two months
• Bank statements not older than two months
• Rental agreement (if applicable)
• Passport-sized photographs of all directors and members ?

2. Memorandum and Articles of Association (MoA & AoA)

• MoA: Must be filed in Form INC-13, detailing the company's objectives and scope.
• Each subscriber must sign both agreements in front of at least one witness, including their name, address, description, and occupation.
• AoA: Regulates the internal management of the organization.

3. Digital Signature Certificate (DSC)

• Required for all proposed directors are required to sign electronic documents during the registration process

4. Director Identification Number (DIN)

• Each proposed director must obtain a DIN by filing Form DIR-3 with the Registrar of Companies (RoC)

5. Registered Office Proof

Below are the documents required to verify the registered office address:

• Utility bills (electricity, water, or gas) not older than two months
• Rental agreement (if applicable)
• No Objection Certificate (NOC) from the property owner (if applicable)

6. Estimated Income and Expenditure Statement

• A projected statement detailing the company's income and expenses for the next three years, demonstrating its non-profit nature

7. Consent of Directors and Subscribers

• Form DIR-2: Consent to act as a director.
• Form INC-15: Declaration by each subscriber to the Moa confirming compliance with Section 8 provisions

8. Application Forms

• Form INC-12: Application for a license to operate as a Section 8 company.
• Form SPICe+ (INC-32): Application for the incorporation of the company.
• Form INC-22: Notice of the situation of the registered office.
• Form DIR-12: Particulars of appointment of directors.?

9. Declaration from a Practising Professional

• Form INC-14: Declaration by a Chartered Accountant, Company Secretary, or Cost Accountant in practice, confirming that the MoA and AoA have been drawn up in conformity with the provisions of Section 8 and the affiliated rules.

10. Additional Documents for Foreign Nationals (if applicable)

• Passport copy.
• Address proof (notarized or apostilled).
• Additional identification documents as required

How to Register a Section 8 company?

The following procedures must be followed to register a Section 8 company:

Step 1: Obtain a Digital Signature Certificate (DSC)

A DSC is important for proposed directors to digitally sign forms on the MCA platforms. The licensed Certifying Authorities issue this certificate after they verify the identity of the applicant. The validity of class 3 DSC is 1- 2 years. Other than that, it also offers high security. Once received, the directors must register themselves on the MCA portal. 

Step 2: Apply for Director Identification Number (DIN)

To apply for a Director Identification Number (DIN), each director must submit Form DIR-3 to the Registrar of Companies (RoC). The DIN is a unique identification number assigned to directors, required for all company filings. The form must include identity and address proof of the director for verification.

Step 3: Reserve Company Name

To reserve a company name, use the RUN (Reserve Unique Name) service on the MCA portal. The name ought to be distinct, represent the goal of the firm, and not sound like the names of other companies.  For approval to go smoothly, you must make sure the name conforms to the MCA's naming guidelines.

Step 4: Draft Memorandum and Articles of Association (MoA & AoA)

 Once you have reserved the company’s name, you need to draft the Memorandum of Association (MoA) and Articles of Association (AoA), which will outline the company's goals and internal regulations. These documents must adhere to the specific guidelines set for Section 8 companies and focus on non-profit objectives and governance structures.

Step 5: Apply for a Section 8 License

After you have drafted the MoA and AoA you need to apply for a Section 8 license, you need to submit Form INC-12 along with the Memorandum of Association (MoA), Articles of Association (AoA), as well as other documents that must be submitted to the Registrar of Companies (RoC).  The Companies Act of 2013 requires this license to function as a non-profit.

Step 6: Incorporate the company

Once you receive the Section 8 license, file the SPICe+ (INC-32) form along with the e-MoA (INC-33) and e-AoA (INC-34) on the MCA portal. Include the necessary paperwork, such as your PAN, TAN, and proof of address.

Step 7: Obtain a Certificate of Incorporation

After submitting all necessary documents, the Registrar of Companies (RoC) will verify the application. If everything is in order, your Section 8 business will be formally established when the RoC issues the Certificate of Incorporation.  This certificate contains the unique Corporate Identification Number (CIN) for your business. This will allow you to begin operations and conduct official activities.

Section 8 Company Registration Fees 

The below-listed fees are approximate and can vary based on factors such as authorized capital, state jurisdiction, and the service provider's charges. Here are the approximate registration fees for registering a Section 8 company. It may further vary in accordance with the service provider whom you have chosen.  

• Digital Signature Certificate(DSC):  Rs. 1000-Rs 1500
• Director Identification Number(DIN): Rs 500-Rs 1,000
• Company Name Reservation: Rs. 1000
• Memorandum and Articles of Association: Rs 6,000- 8,000
• Notary and Stamp Charges: Rs 2,000
• Professional Services Fees: Rs. 8000-Rs. 10,000

Non-Compliance Penalties for Section 8 Companies

Section 8 companies in India, established for charitable purposes, must adhere to the provisions of the Companies Act, 2013. However, if a company fails to comply with these regulations can result in significant penalties. Below is a list of common non-compliance scenarios and their associated penalties:

1. Violation of Charitable Objectives

When the company engages in activities contrary to the stated charitable objectives or distributes profits to members.

• Penalties:

If something like this happens, the company may be fined between ?10 lakh and ?1 crore. Responsible directors or officers can face imprisonment for up to three years and/or fines ranging from ?25,000 to ?25 lakh. Other than that, the Central Government has the authority to revoke the company's license and terminate its Section 8 status.

2. Failure to File Annual Returns

Non-submission of financial statements (Form AOC-4) or annual returns (Form MGT-7) within the prescribed time frame.

• Penalties:

If a Section 8 company fails to file its annual returns on time, it is charged ?100 for each day of delay. In addition, Sections 137 and 92 of the Companies Act of 2013 may impose additional fines on the directors.

3. Non-Maintenance of Books of Accounts

If a company fails to maintain proper financial records as mandated under Section 128.

• Penalties:

If a Section 8 company fails to maintain proper books of accounts as required under Section 128 of the Companies Act, 2013, it can lead to a fine of ?50,000 for the company. Directors may also face an additional penalty of ?1,000 per day during the period of default, subject to a maximum of ?5 lakh

4. Non-Compliance with Board Meeting Requirements

If the company fails to conduct the required number of board meetings (minimum 2 for private companies and 4 for public companies) as per the Companies Act, 2013.

• Penalties:

If a Section 8 company does not hold the required number of board meetings, it may be fined ?25,000. Each director involved can also be fined ?5,000 for non-compliance.

5. Non-Filing of Income Tax Returns

Failure to file income tax returns leads to the loss of tax exemptions under Sections 12A and 80G.

• Penalties:

When a Section 8 company does not file its income tax return, it can result in the loss of tax exemptions available under Sections 12A and 80G. It may also lead to interest charges and other penalties as per the provisions of the Income Tax Act.

6. Misrepresentation in Documents

If a company submits false or misleading information to the Registrar of Companies (RoC) or the Ministry of Corporate Affairs (MCA).

• Penalties:

If a Section 8 company submits false or misleading information in its documents, it can be fined between ?50,000 and ?10 lakh. Directors responsible may face imprisonment for up to 6 months and/or monetary penalties.

7. Non-Compliance with Statutory Audits

When a company fails to conduct annual audits as required by the Companies Act, 2013.

• Penalties:

If a company fails to conduct statutory audits can lead to a fine of ?25,000 for the company. Each director may also be fined ?10,000, with the total penalty capped at ?1 lakh.

8. Misuse of Funds

The company should not utilize their funds for purposes other than those stated in the company's objectives.

• Penalties:

If a Section 8 company misuses its funds, it may face heavy fines based on the amount misused. Involved directors may face fraud charges under Section 447 of the Companies Act of 2013.

9. Late Filing of Other Statutory Documents

Delays in submitting forms such as INC-22 (change of registered office) or DIR-3 KYC (director updates).

• Penalties:

Late submission of statutory documents leads to a fee of ?100 per day. In case of prolonged delay, further penalties may also apply as per legal provisions.

Annual Compliances for Section 8 Company in India

Section 8 companies must follow certain rules every year to stay compliant with the law. These rules are set under the Companies Act, 2013, and the Ministry of Corporate Affairs (MCA) monitors them. Listed below are the annual compliance requirements for a Section 8 company in India:

1. At Least Two Board Meetings

In a fiscal year, all Section 8 companies are required to have at least two board meetings. The gap between the meetings should not exceed 6 months.

2. Maintain Proper Books of Accounts

The company must keep clear records of its financial activities. This includes income, expenses, assets, and liabilities as per Section 128 of the Companies Act.

3. Prepare Financial Statements

At the end of each financial year, the company should prepare the balance sheet, profit and loss account, and cash flow statement.

4. Conduct a Statutory Audit

An annual audit by a registered Chartered Accountant is mandatory. The audit guarantees that financial records are accurate.

5. Hold Annual General Meeting (AGM)

The AGM should be conducted once a year, within six months of the end of the financial year. It allows members to review and approve financials and discuss key decisions.

6. File Income Tax Return (ITR)

The company must file its income tax return each year. This is needed even if the company is registered for tax exemptions under Section 12AA or 80G.

7. File Financial Statements with ROC (Form AOC-4)

The audited financial statements, including the balance sheet and P&L, must be submitted to the Registrar of Companies using Form AOC-4.

8. File Annual Return (Form MGT-7)

An annual return with key company details like directors, shareholders, and structure must be filed every year in Form MGT-7.

9. Other Compliances (If Applicable)

If the company wants tax benefits or exemptions, it should apply for 12AA and 80G registration under the Income Tax Act.

Benefits of Registering a Section 8 Company

A Section 8 company in India gives several legal and financial benefits to individuals or groups that aim to promote charitable or non-profit goals.

1. No Minimum Capital Needed

There is no set minimum capital needed to register a Section 8 business. This means you can start the company with any amount that suits your purpose. There is no legal restriction on the capital amount. This flexibility allows more people to form non-profit organizations without worrying about large investments. You can increase the capital later based on your needs. This helps focus more on charitable work rather than arranging funds just for registration.

2. Tax Benefits

Under Section 12AA of the Income Tax Act, Section 8 corporations are eligible for tax incentives. To receive this benefit, the company must apply for 12AA registration with the Income Tax Department. Once registered, the income used only for charitable or social purposes is not taxed. This helps the company save money and use more funds for its mission. The registration also increases the company’s trust value among donors and government bodies. If the company misuses the funds or does not follow its objectives, the tax exemption may be cancelled.

3. No Stamp Duty

At the time of registration, Section 8 corporations are exempt from paying stamp duty.  Under the 2013 Companies Act, this regulation is applicable. In other company types, stamp duty is charged on the Memorandum and Articles of Association. But for Section 8 companies, this fee is fully waived. This makes the registration process cheaper. The government gives this benefit to support non-profit work. It helps more people start social, charitable, or educational organisations without incurring high initial costs. This is one of the biggest financial advantages for Section 8 company founders.

4. Separate Legal Identity

A Section 8 company is a separate legal entity from its founders. Along with signing contracts in its name, the business can also open bank accounts and own real estate. This separation protects members from personal liability and gives the company the ability to operate independently. It can build its reputation and handle legal matters on its own.

5. Higher Credibility

Section 8 companies must follow strict rules and conduct annual audits, ensuring transparency and accountability. This increases confidence among stakeholders and the general public. Unlike unregistered NGOS, they are held to higher standards, making them more credible and reliable. This strengthens their reputation and encourages support.

6. Tax Benefits to Donors

Donors may deduct their donations from taxes if a Section 8 firm is registered under Section 80G. Donors may deduct their donations from taxes if a Section 8 firm is registered under Section 80G.  This incentive encourages more people to donate, supporting the company's charitable objectives.

To sum up, a Section 8 company provides a great structure for individuals or groups who are looking to pursue charitable, educational, or social welfare objectives. With tax benefits, limited liability, and a clear focus on non-profit goals, it ensures legal recognition and credibility. These types of companies are an excellent choice for people who are dedicated to make a positive impact. However, the registration process can be a bit confusing and hectic. Hence, if you want to know how to register a Section 8 company, it is best to follow a guided process to meet all legal requirements. For seamless registration and expert support, Online Legal India offers services tailored to your needs.