Not all businesses are focused on making money through trade and commerce. Many businesses are primarily focused on philanthropic and non-profit goals. Because they are recognized under Section 8 of the Companies Act, 2013, such entities are referred to as Section 8 Companies. These businesses spend all of their earnings and profits to achieve their goals.
The Definition Of Section 8 Company
A Section 8 company is one whose goals are to push the humanities, commerce, science, research, education, sports, charity, welfare, religion, environmental protection, or other similar goals, consistent with the Companies Act. These organizations similarly devote their profits to furthering their mission and don’t pay dividends to their shareholders.
Previously, these businesses were defined by Section 25 of the Companies Act of 1956, which contained identical provisions. On the other hand, the new Act provides that Section 8 businesses can have various goals.
The Federation of Indian Chambers of Commerce and Industry (FICCI) and therefore the Confederation of Indian Industries are two well-known Section 8 companies (CII). The goal of those businesses is to help with the expansion of trade and commerce in India.
Features Of Section 8 Company
A Section 8 company has the subsequent distinguishing characteristics that the majority of other sorts of businesses lack:
- Section 8 firms have charitable goals and don’t seek to get a profit. Their motivations are entirely benevolent. They work to further issues like science, culture, research, sports, and religion, among others.
- Section 8 corporations, unlike all other corporations, are exempt from having to possess a minimum paid-up share capital.
- Limited liability: Members of those corporations can only be held vulnerable to a specific extent. In any event, their liabilities can’t be endless.
- Government license: These businesses can only operate if they receive a license from the national. This license can even be revoked by the govt.
- Privileges: Since these companies possess charitable objectives, the businesses Act has accorded several benefits and exemptions to them.
- Firms as members: except for individuals and associations of persons, Section 8 also allows firms to be members of those companies.
Formation Of The Section 8 Company
Under Section 8 of the businesses Act, someone or a gaggle of individuals can apply to the Registrar of Companies with the mandatory forms to include a charitable corporation. If satisfied, the Central Government can accept such an application on any terms and conditions set by the license it’s granted. After the corporate has been accepted, the Registrar of Companies will register it after the applicants have paid all of the desired costs.
It’s crucial to stay in mind that such businesses can only be limited. during this circumstance, all Ltd. advantages and liabilities apply. Furthermore, unlike all other corporations, these ones don’t need to include the terms “Limited” or “Private Limited” in their names.
Since the existence of such companies is predicated on the license granted to them, they can’t even alter their memorandum or articles of association without the Central Government’s permission. They also cannot do anything that the license disallows.
Cancellation Of License
A license from the Central Government is required for Section 8 businesses. All of these licenses are also revocable for the reasons listed below:
- When the company’s activity is fraudulent,
- or when it breaches its own purposes and public policy, it violates Section 8 rules.
Under certain situations, the government may order that the corporation be wound up or merged with another similar company. Before making such decisions, the government must consult with the company.
Winding Up 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 those assets to an identical company. It also can order that they need to be sold and also the proceeds of this sale should be credited to the Insolvency and Bankruptcy Fund.
Punishment for Disobedience
A punishment ranging from Rs. 10 lakhs to Rs. 1 crore is imposed on any corporation that violates Section 8’s stipulations. Furthermore, the company’s directors and officers face up to three years in prison and fines ranging from Rs. 25,000 to Rs. 25 lakhs. If they conduct any business with dishonest motivations, such officers may be prosecuted under the strict terms of Section 447 (dealing with fraud).
Advantages Of Forming Section 8 Company
People prefer to perform philanthropic activities through Section 8 corporations rather than traditional NGOs and groups. This is because of their limited liability, which means that their personal assets will not be utilized to cover the company’s debts. These businesses benefit from the following advantages:
- Members are only liable to a certain extent.
- There are no capital requirements.
- They are exempt from a number of taxes.
- For registration, there are no stamp duties or expensive fees to pay.
- They exist indefinitely and have their own legal position.
- Exemptions from a number of procedural requirements.
- Because they are recognized by the Central Government’s license, they have more credibility than NGOs, societies, and trusts.
Disadvantages Of Forming Section 8 Company
Despite their many advantages, these businesses have the following disadvantages:
- The company’s members are not entitled to any dividends.
- Benefits and allowances are not provided to officers and directors.
- The revenues must only be used to further philanthropic goals and objectives.
- The Central Government must approve any changes to the memorandum and articles.
- The license can be revoked for a variety of reasons.