Section 8 Companies vs Trusts

Introduction

Section 8 companies were introduced under the Companies Act 1913. They permitted companies with charitable objects etc. to be registered without the words 'Limited' or 'Private Limited'. Section 8 continues to provide for restrictions on application of profits and permits the same only for the purpose for which the company is promoted. It prohibits declaration of dividend, continues to permit partnership firms to be a member of Section 8 companies etc. Companies Act, 2013 elaborates on the objects for such companies and specifies objects like sports, education, research, social welfare and protection of environment for which the companies can be formed under this section.

A "trust" is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.

The purpose of this article is to compare different types of charitable institutions to determine which are better suited for emerging founders, considering advantages, compliance requirements, tax benefits, and other relevant factors.

Advantages and Disadvantages

REGISTRATION PROCESS

Section 8 companies

Registration process: The process of registering a Section 8 Company involves several steps and legal formalities. Here's a step-by-step breakdown:

Step 1: Obtain Digital Signature Certificate (DSC)

The first step is to obtain a Digital Signature Certificate (DSC) for the proposed directors of the Section 8 Company. This certificate is required for the online filing of documents with the Ministry of Corporate Affairs (MCA). Form DIR-3 is used for obtaining the DIN and should be filed along with the DSC of the proposed directors.

Forms to be used: DIR-3, DSC

Step 2: Obtain Director Identification Number (DIN)

After obtaining the DSC, the next step is to apply for a Director Identification Number (DIN) for the proposed directors. The DIN number is a unique identification number issued by the MCA to individuals who wish to be directors of a company in India.

Forms to be used: DIR-3

Step 3: Reserve the Company Name

The next step is to reserve the name of the proposed Company with the MCA. The Section 8 company name should be unique and not be similar to any existing company name. Form INC-1 is used for reserving the company name.

Forms to be used: INC-1

Step 4: File the Application for Incorporation

After the company name is approved, the next step is to apply for Section 8 Company incorporation. The application for incorporation is filed in Form INC-32 along with the Company's Memorandum of Association (MOA) and Articles of Association (AOA).

Forms to be used: INC-32, MOA, and AOA

Step 5: Obtain a License for Section 8 Company

Once the application for incorporation is approved, the next step is to obtain a license for the Section 8 Company. Form INC-12 is used for obtaining the license. It should be filed along with the necessary documents.

Forms to be used: INC-12

Step 6: Obtain a Certificate of Incorporation

After obtaining the license, the MCA issues a Certificate of Incorporation in Form INC-16. This certificate confirms the incorporation of the Section 8 Company.

Forms to be used: INC-16

In summary, the forms used for Section 8 Company registration are DIR-3, DSC, INC-1, INC-32, MOA, AOA, INC-12, and INC-16

Documents Required

• Articles of Association (AOA) and Memorandum of Association (MOA)
• Declaration by the first director(s) and subscriber(s) (an affidavit is not required)
• Proof of office address, such as a copy of utility bills like electricity, water, or gas bill
• Copy of the certificate of incorporation (COI) of an overseas corporate body (if any)
• A resolution passed by the promoter company
• Consent of Nominee (INC-3)
• Residential and identity proof of nominees and subscribers
• Applicant's identity and residential proof
• Digital Signature Certificate (DSC)
• Declaration of unregistered companies.

TRUSTS:

Registration Process

1. Draft the Trust Deed: This is the most crucial step. The Trust Deed should clearly state:

• Name and address of the Settlor.
• Name(s) and address(es) of the Trustee(s).
• Name(s) of the Beneficiary(ies) or the charitable object if it's a public trust.
• Name of the Trust.
• Address of the Trust.
• The trust property (movable or immovable).
• The objectives of the trust.
• Rules and regulations for managing the trust, appointing/removing trustees, etc.
• Duration of the trust (if not perpetual).

1. Procure Stamp Paper: The Trust Deed must be executed on non-judicial stamp paper of appropriate value, which varies by state.
2. Signatures and Witnesses: The Settlor and Trustees must sign the Trust Deed in the presence of at least two independent witnesses.
3. Obtain DSC (Digital Signature Certificate): For certain online filings related to trusts, especially for post-registration compliance like income tax.
4. Approach the Sub-Registrar: Immovable property must be registered with the trust deed. Whereas for movable property, registration is optional but recommended for legal validity.
5. Submit Documents: Along with the Trust Deed, submit KYC documents of the Settlor and Trustees.
6. Pay Registration Fees: Pay the applicable registration fees to the Sub-Registrar.
7. Obtain Registered Deed: Once the Sub-Registrar is satisfied, the Trust Deed will be registered.
8. Download Copy: Log in to your state-specified trust portal, select your trust, and click "Download Trust Registration Certificate.

Documents Required

• Original signed trust deed on the prescribed stamp paper
• Identity proof of settlor and trustees (Aadhaar, PAN, Voter ID, Passport, or Driving License)
• Address proof of settlor and trustees (Aadhaar, recent utility bill, or bank statement)
• PAN card application for the trust (to be obtained post-registration)
• Passport-size photographs of the settlor and trustees
• Registered office address proof (property title deed or lease agreement/NOC)
• Details of trust assets (list of movable and immovable properties)
• Digital Signature Certificate (DSC) for authorized signatories.

Management and Governance Structure

Section 8 companies typically adopt a governance structure comprising a board of directors, executive management, and oversight mechanisms to oversee their operations and decision-making processes. The Board of Trustees is ultimately responsible for everything that happens at the Trust and for ensuring it meets its statutory purpose. The Board does not manage the Trust; rather its job is to ensure the Trust is managed the way it wishes to be.

Compliance and Regulatory Requirements

Compliances Section 8 companies should follow are Auditor Appointment Compliance (Filing Form ADT-1), Statutory Register Maintenance Requirement, Conducting Meetings, Board of Directors' Report, Preparation of Financial Statements, Filing of Financial Statements (AOC-4 Form), Filing of Annual Returns (MGT-7 Form), Filing of Income Tax Return for Section 8 Companies.

Compliance requirement of Trusts is Filing of Income Tax Return (ITR-5/ITR-7), Reporting of Foreign Contributions, Filing of TDS return and issuance of TDS certificates, Publication of accounts in newspaper, Filing of GST Returns, Audit of Accounts (Section 44AB)

Funding and Donor Trustworthiness

Section 8 companies have a good reputation among stakeholders and the general public due to their status as a nonprofit organization. When the donation is made in large scale the donors choose Section 8 companies over trusts.

Tax Benefits and Exemptions

Section 8 companies: As a Non-Profit Organization (NPO), a Section 8 company is exempt from certain provisions of the income tax law. Additionally, it benefits from various tax deductions and exemptions under Section 80G of the Income Tax Act, 1961. Below is a list of the key tax benefits available to Section 8 companies:

1. Lower Stamp Duty: Section 8 companies are required to pay less stamp duty compared to other types of companies.
2. Rebate for Donors: Donors contributing to a Section 8 company can claim a 50% rebate on their donations under Section 80G. The validity of this rebate can range from one to three years.
3. Taxation on Profits: The profits of Section 8 companies are taxed at a rate of 30%, similar to other organizations, subject to applicable exemptions.
4. Tax Exemption Under Section 12AA: If a Section 8 company is registered under Section 12AA of the Income Tax Act, its profits will be fully exempt from tax, and no tax will be levied on the company.

Trusts: All the donations received by charitable trusts are exempt from taxes, on satisfaction of certain conditions. The taxation of charitable trusts is covered under Section 11 of the Income Tax Act. Only trusts established for charitable or religious purposes can claim exemption under the act, and they need to file ITR even though their income is exempt from taxation. These exemptions can only be claimed if the trust is registered under Section 12AA. Under Section 115BBC, anonymous donations to charitable trusts can be taxed at a 30% maximum marginal rate if they exceed Rs. 1 lakh or 5% of the total donations, whichever is higher.

If we compare Section 8 companies and Trusts under this head Section 8 company is comparatively beneficial.

Donation Benefits u/s 80G

When it comes to donor's tax benefits, Section 8 companies have a clear advantage in attracting institutional funding. Donors contributing to Section 8 companies can avail themselves of tax benefits under Section 80G. This provision allows donors to claim deductions on their taxable income for the amount donated to the Section 8 company, subject to certain limits and conditions. Public charitable trusts receive similar 80G benefits but face more limitations – religious trusts may have restricted eligibility, approvals often require renewal every five-year, smaller trusts sometimes struggle with the documentations demands. This makes Section 8 companies the preferred choice for organizations relying on large donations.

Foreign Contribution (FCRA) Regulation

For organizations receiving foreign funding, Section 8 companies find FCRA registration somewhat easier to obtain due to their corporate governance structure and financial reporting system. While the process remains stringent, approval but face greater scrutiny of individual trustee, and religious-affiliated trusts encounter additional hurdles. Many trusts find the FCRA process more challenging, with higher reported rejection rates compared to corporate structures.

Ownership of assets and legal liability

A Section 8 Company keeps assets its own name, providing perpetual successions-the organization persists even if directors change. Liability is only for the company's assets. In a trust, assets are owned by trustees, subjecting them to personal liability if mishandled. Successions rely on the trust deed, and conflict between trustees can interrupt business.

Section 8 companies: Members of this company enjoy limited liability protection. This means they are not personally liable for the company's debts beyond their investment in shares. This company operates as a distinct legal entity separate from its members. This feature allows it to own property, enter contracts, as well as sue or be sued in its name. A Section 8 company continues to exist independently of changes in ownership or management. This feature ensures stability and also continuity in operations.

Trusts: The person establishing a trust is called the trustor or grantor. The person who oversees and manages the trust is called the trustee. In a revocable trust, the trustor may control the trust as well, but in an irrevocable trust, the trustee must be somebody else. A trust is generally employed to hold assets so that they are safe from creditors or others that might have a claim on them after the trustor's death.

Cost and Administrative Burden

Section 8 companies: Registration fees

The cost of registering a Section 8 Company depends on various factors such as government fees, professional charges, and compliance requirements. Below is a detailed breakdown of the major expenses

Note: The aforementioned fees are exclusive of tax

Trusts:

A trust is much more cost effective, with drafting of trust deed between INR 5000 (Indian Rupees Five Thousand)- INR 15000 (Indian Rupees Fifteen Thousand), sub registrar office registration fees ranging from INR 1000 (Indian Rupees One Thousand)- INR 2000 (Indian Rupees Two Thousand), and minimal stamp duties (0.5%-1% of property value in certain states). The simplified process for Trusts makes them an affordable choice for small-scale endeavors.

Case Laws

Section 8 of Companies Act,2013

Commissioner of Income Tax vs. Surat Art Silk Cloth Manufacturers Association

The Supreme court held that the term "charitable purpose" under the income tax act includes activities for the advancement for the advancement of general public utility, even if they involve a profit element, provided the profits are not distributed among members. This judgement is pivotal for Section 8 companies claiming tax exemptions under 12A and 80G.

Trusts

CIT vs. Thanthi Trust

The supreme court held that a trust running a newspaper could claim charitable status if its primary objective was education/public utility, reinforcing the flexibility of trust structures under tax laws.

Conclusion

When choosing between a Section 8 company and a trust in India for establishing a non-profit, the decision largely depends on the nature, scale and long-term vision of your organization. A Section 8 company is ideal for those aiming to build a large, professionally managed and scalable entity with strong governance, transparency and access to institutional funding. It is especially beneficial if you plan to receive CRS funds, foreign contributions or major grants, as its structure compliance under the companies act, 2013, inspires greater donor confidence. Although it involves higher costs and stricter legal formalities, it ensures continuity, legal independence and a higher degree of credibility. On the other hand, a trust a better suited for smaller, community-based and flexible setup. Trust operates with minimal compliance, are easier to manage and are governed by trust deeds with simpler rules. However, they may lack the institutional transparency and formal recognition required for large-scale fundraising or cross border operations. While a trust relies on personal commitment of trustees and does not have a separate legal identity, a Section 8 company functions independently of its directors and provides stronger legal safeguards. Ultimately, if your organization is in its early stages with limited resources and a localized focus, a trust might be the more practical option. But if your goal is to grow into a substantial, high impact organization with broader outreach diverse funding, a Section 8 company offers the structure and legitimacy to support that ambition. In some cases, organizations may even operate both structures using a trust for community operation and a Section 8 company for formal engagement and fundraising- striking a balance between flexibility and credibility.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.