Trust, Society, and Section-8 Company?

Generally speaking, any organization that devotes its funds for public welfare is a not-for-profit organization (NPO).

This includes schools, colleges, hospitals, religious organizations, etc. It also includes non-governmental organizations (NGOs).

There are three common forms of not-for-profit organizations: Trusts, Societies and Sec. 8 Companies. Which one should you choose?

 

TRUST

Trusts are the oldest form of charitable organizations. These may be private or public. Private Trusts are formed for the benefit of family members, or a very small set of known persons

A private trust is not a charitable trust. Private trusts are governed by Indian Trusts Act, 1882. This Act does not apply to public trusts (1).

In Maharashtra and Gujarat, public charitable trusts must be formed and registered under the Bombay Public Trusts Act, 1950.

In other states, public trusts are mostly governed by common law (2) This means that you can form a public trust by preparing a trust deed and registering it under Registration Act, 1908 (3)

You just need a settler and two or more trustees, who may be Indian or foreign citizens (4) Trustees can also be paid employees of the Trust

A charitable trust formed anywhere in India can operate in all the states (5)

  • Trusts and charities are under the Concurrent List in the Constitution of India. Each state is free to frame its own laws with regard to trusts. The Centre can also frame an all-India law, which will prevail wherever a state law has not been passed. However, the Centre has not passed any law on charitable trusts so far.
  • Some other states, such as Rajasthan, Andhra Pradesh (now Telangana and Seemandhra), also have laws to govern public trusts. However, even in these states, a charitable trust may be formed under common law.
  • This Act provides for registration of various legal documents, property transfers, etc. The registration is done by Court Registrar, and a copy of the trust deed taken on court record. The original deed is stamped and returned to the trustees. No registration certificate is issued.
  • A trust can also have just one trustee, though it is usual to have at least two. This ensures continuity, in case one trustee becomes incapable. The settler can also be a trustee.
  • Trusts formed outside Gujarat or Maharashtra may need to register themselves under Bombay Public Trusts Act, 1950 also – if they want to raise funds (or have any assets situated) in either of these states.
  • Except in Maharashtra and Gujarat
  • Supreme Court’s observations in Commissioner of Income Tax vs. Kamla Town Trust, 217 ITR 699 (SC) 1996
  • Under sec. 26 of the Specific Relief Act, 1963
  • Except in Maharashtra and Gujarat where public trusts are regulated.
  • Such trusts are often formed due to ease and low cost of formation. However, these are nominal trusts, in the sense that the property entrusted is a very small amount, usually just a thousand rupees. 

A trust is a bit like a castle, complete with a moat and drawbridge. You lay in supplies for a couple of hundred years, post archers (or lawyers) on the battlements, and get on with your work. But a trust doesn’t work well in a fluid situation. And if you don’t have enough funds of your own, you need to allow tourists (read donors) to pay for the upkeep – just as so many former princes and dukes are doing these days.

In general, trusts are the easiest to form and run. However, as there is no regulatory oversight (6).

Disputes have to go to court. The trust deed can also be modified only by the settler making a supplementary trust deed (7).

If the settler is not available, you need to go to court for modifying the trust deed (8) there are no regulatory requirements for governance or public filing of accounts.

A public trust is ideal when a person wants to dedicate their own property to a specific cause for all times to come. It is not so suitable (9) when you want to raise funds from the public for the trust’s activities (10)

 

 

SOCIETIES

Societies are a relatively modern form. These are formed when about seven persons come together for a common purpose in a general body (11)

These may be Indians or foreigners (12) You can add more members. Each general body member has one vote. The general body then elects a governing board (usually 5-7 persons) from among the members. The governing board manages the organization directly or through executive employees.

Societies in many states are governed by the Societies Registration Act, 1860 in its original or amended form. However, a number of states have passed their own laws for regulating societies – these laws have replaced the original Societies Registration Act, 1860.

A society formed in one state can usually operate in other states, if its Memorandum says so(13) However, in many states, the registrars may refuse to register such a society. Or they may impose additional conditions. For instance, you can register an all-India society in Delhi, only if you have members from several different states.

Governance and public filing requirements vary from one state to another. In general, every society has to file a list of governing body members annually. Many states ask for filing of audited accounts as well. However, there are as many which do not. The main Societies Registration Act, 1860 itself does not have any provision for filing of audited accounts. In most states (except Tamil Nadu)14, members and office bearers can also be paid employees of the society.

Formation and governance of a society is more difficult than a trust, but easier than a company. However, finding and corralling seven members can sometimes be difficult. This form works best for people with state-level objectives, who want to focus on their activities, and cannot be bothered with too many formalities.

A society is somewhat like a bus full of pilgrims, driven by one of the passengers. Arguments may break out over who pays for the fuel and for repairs. There might be quarrels about where to go and how long to stop at each shrine. The driver may be impeached every now and then. To avoid this, most societies restrict membership to the minimum, and raise funds from outsiders.

  • In some states, five persons can form a society.
  • There is no legal restriction on foreigners being members. However, in some states, registrars may be reluctant to register such societies. People often form the society with Indians, and admit the foreigners as members later on.
  • The Government is working on a bill to regulate societies which operate across state-borders, or have donors from outside the state or country.
  • Sec. 25(3) of the Tamil Nadu Societies Registration Act, 1975. Office bearers cannot be paid any salary or honorarium

 

SECTION-8 COMPANIES

 

These are limited companies formed under the Companies Act. The Government grants them a special license under section 8 to drop the words ‘Private Limited’ or ‘Limited’ from their name (15) there are three conditions for this;

  • The company must be formed for the charitable trust (16)
  • Income and profits should be applied towards these objects.
  • It should not pay any dividend to its members.
  • Such a company can operate in any state without additional formalities. It can be formed with just two persons (17)

Member may be Indian or Foreigners (18) it should have at least two directors who need be members, the company can be formed with the shares each member get votes in proportion to their shares, if the company formed with guarantee, then each member get one vote.

Can directors and members be paid for their services? This is now easier. You can pay prudent remuneration for actual services – without getting government approval (19) However, there are severe penalties (20) for violation of any provisions of the Act. And unlike the previous Act, charitable companies now enjoy no relaxation in fees or other formalities. Whether the company is big or small, it must comply with all requirements of the Companies Act (21)

Forming a sec. 8 company is more complicated than a trust or a society. It costs you more and takes more time. There are a number of complex formalities in running the company, and it is easy to make a costly mistake. Even so, a sec. 8 company is more robust, transparent and accountable than a trust or a society. If you are not afraid of paperwork, and can afford to spend the extra money, then this is the best form to choose for publicly supported development work.

Using a company for non-profit work is like flying a plane. It costs more money to buy and to maintain. You need a trained pilot and a good crew. You are also heavily regulated. However, if you can afford it and have a long journey ahead, you might find this safer and more comfortable than taking a bus

 

  • Same as sec. 25 companies under the Companies Act, 1956
  • Promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object
  • Both Private Limited and Public Limited companies can get this license. However, One Person Companies (OPC) cannot get a license under this section (rule 3(5), Companies (Incorporation) Rules, 2014).
  • Having foreigners on Governing Board, or in control, usually makes it difficult to get FCRA permission.
  • Clauses 6, Form INC 16
  • Rs.10 lakh to one crore on company; Rs. 25,000 to 25 lakh for officers, as well as imprisonment unto three years. In case of fraud, the fine may be three times to amount involved, as well as imprisonment ranging from 6 months to 10 years.
  • Sec. 8 companies cannot get small company status, and must pay fees applicable to large private companies and public companies. 

 

The following table gives a comparative analysis

Particular Trust Society Sec-8 Companies
 

Formation

One week One Month 2-3 Months
Formation Costs Rs. 1,000 – 5,000 Rs. 3,000 – 10,000 Rs. 30,000 – 75,000
Annual Costs Rs. 5,000 + Rs. 10,000 + Rs. 30,000 +
Members Two + Seven + Two +
Foreigners as members / Directors No restriction Not prohibited by law Allowed
Payments to members and directors Allowed Allowed in most states for actual services Allowed for actual

Services

Control Easy Difficult Easy
Public Transparency Low Moderate High
Modifications Very difficult Moderate difficulty Moderate difficulty
Area of Operation Most of India Usually restricted

to state boundaries

All of India
Tax and FCRA approvals Eligible Eligible Eligible
Governing Law Common law in most states Societies Registration Act or equivalent state law Companies Act, 2013
Regulation Very little Moderate High
Paperwork Very little Moderate High
Penalties under governing law None in most states Few Large number

 

 

 

Key Comparison between Society Vs Trust Vs Company

Registering Authority Registrar of Company. Registrar or Deputy Reg. of Societies of the concerned State/ Charity Commissioner. Sub-Registrar of Registration/ Charity Commissioner.
Issue of Name approval Before registration name approval is required by application to ROC. If any other NGO is not registered with the required Name in the particular jurisdiction of registration, then it is possible. And if any other Society (NGO) is registered with the name in that registrar then it cannot be approved and provided. Name approval is not required, if the name is not under Emblem Act.
Eligibility of Family Members to be Member of Organisation Anybody can be the director of a Company. But certain Government Ministries/ Departments and funding agencies can refuse funding for the Company having same family members as directors. Members of the same family cannot be member in a Society. There is no restriction in formation of a Trust with members of the same family. But certain Government Ministries/ Departments and funding agencies can refuse funding to the Trusts those are having same family members as Trustee. So initially family members can be there to form NGO but at the time of funding from certain Ministries or Funding agencies the Trustees can be

Changed.

Minimum Members/ Directors/ Trustees at state level Registration required Minimum Two Directors. Minimum Seven Members. At least (Minimum) Two Trustees.
Minimum Members at National level required Minimum Two Directors. Minimum Eight Members from 8 different states are required in National level Society. Minimum Two Trustees only, no limit of maximum Trustees/ Members.
Governing Structure 1. General Body of Directors. 2. Board of Directors. 1. General Body. 2. Executive Committee. 1. General Body/Board of Trustees. 2. Executive Committee.

Or Only one General Body of Trustees.

 

 

Procedures, Rules and Requirements Company Society Trust
Registration processes have the status of Non Profit Organisation (NGO) / Non Profit Organisation (NPO) Non Profit Company is an NGO/ NPO. Society is an NGO / NPO. Trust is an NGO / NPO There is no difference in the registration process in the status of ‘NGO’ in any organisation registration process.
Law/Act applied for to register NGO Companies Act,2013 Societies Registration Act, 1860 Private Trusts are governed by Indian Trusts Act, 1882.

Public Trusts do not

have national level governing law.

 

Times take to Form 1-2 Weeks 1-2 Months From 2 days to one week

 

 

 

 

 

 

 

 

 

 

Area of operation of NGO Company can be operated throughout India. National validity is there as the registration is granted by the Central Government. Society can be operated throughout India when registered as a National level society. When a society is registered in one State, area of operation will be in that state only. Registration under Trust Act has national validity and can operate throughout India. Some certain terms, clauses and processes are applicable during registration and after registration.
Status for Rights of Vote and Power Provisions of the voting rights vary on the basis of shareholding capacity of Directors. All members of a society have equal rights in the General Body. All Trustees have equal rights except the Settler, if there are any specific powers are provided. Authorised persons have different powers.
Can get funding. There is no difference to get funding in any of the NGO form. Company can have funding possibilities. Society can get funding if it is eligible according to the terms of the funding agencies or Government Ministries or departments. Trust can get funding if it is eligible according to the certain terms of the funding agencies or Government Ministries or departments.
Annual Reports and other Documents to be submitted or filed apart from Income tax department Company has to submit Annual Return and audited accounts at the financial year end. According to the Section 4 of Societies Registration Act Annual list of managing body is to be filed every year. Resolutions are also submitted for approval in certain cases in certain states and in all or certain cases in some states. No Annual report, resolution or any documents are required to be submitted or filed after registration of Trust to Registering authorities. Only the General body and other executive committees or any sub committees have to maintain their own registers of meetings, resolutions, decisions and/or any other activities regarding decisions.
General Body and Board meetings In the Companies Act there are specific provisions of meetings. At least one Annual General Meeting and 4 Board meetings are required to be held

Every year.

 

General Body and Board meetings are required to be held as prescribed in the bye laws of the society. To follow the democratic pattern of society, regular meetings should be held for active societies.

 

No provisions exist to organize meetings. But to follow the democratic pattern of working of NGO registered under Trust Act, regular

meetings should be organized for active Trusts. To organize meetings, adequate rules can be framed in the trust deed.

 

 

Transfer of Directorship/ Membership/ Trusteeship Directorship can be transferred. Restriction on the transfer can also be placed. Membership of Society is not transferable according to the Act. There is no provision to transfer the Trusteeship in the Indian Trust Act.
Can use Foundation, Trust, Society, Samiti, NGO words with the name of organisation Foundation, Samiti word can be used with the name. Foundation, Samiti, Society, Organisation words can be used with the name of society. In the name of Trust the words Foundation, Trust, Samiti, Society or any words can be used. No need to use Trust word along with the name during Trust registration.
Can a foreigner be a director/ member/ trustee Foreigners can be directors. A foreigner can be a member of society. There is no restriction and provision to foreigners to be or not to be members. So foreigners can be members of a Trust.
If there is a foreigner in any NGO There may be certain difficulties to get FCRA registration. It is difficult to get FCRA registration if there is any foreigner member in a Society. If there are any foreigner members in a Trust then it may not possible to get FCRA.
Provision of Recurring expenditure Annual Returns and balance Sheet are filed with certain fees. Have to pay fee if there is any resolution to approve. Negligible and minimum statutory compliances are required. No statutory recurring expenditure after registration.
Eligible for School/ College Formation Non Profit Company is eligible for School/ College formation except in certain States of India. Society is eligible for School/ College formation in all States of India, including Rajasthan. Trust is eligible for School/ College formation except in few certain States of India like Rajasthan. So if you want to form school/ college in those states you have to register a separate society and can run a Trust as an NGO for social development works.
Can members get Payment or can not General body of Company can approve to get

Payment.

 

General body can permit and approve to get payment. Trustee cannot receive Payment but if there is a

Provision to get funds in the trust deed then Trustees can receive payment for project or if the Trustee is providing professional service or consultancy.

 

 

Disclaimer: This presentation has been prepared by LIFE EDUCARE for restricted distribution. No representation or warranty, either expressed or implied, is made nor responsibility of any kind is accepted by LIFE EDUCARE, its directors or employees either as to the accuracy or completeness of any information stated in this document. Neither The firm nor any of its affiliates and/or their directors, officers, employees shall in any way be responsible or liable for any losses or damages whatsoever which any person may suffer or incur as a result of acting or otherwise relying upon anything stated or inferred in or omitted from this presentation. Opinions and projections found in this presentation reflect our opinion as of the presentation date and are subject to change without notice. This presentation is neither intended nor should be considered as an offer or solicitation, or as the basis for any contract, for purchase of any security, loan or other financial instruments.

 

 

 

 

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