What are the Advantages and Disadvantages of Section 8 Company?

Not every company strives to earn profit by commencing trade; many companies primarily work on non-profit and charitable objectives. Such companies are known as Section 8 as per Companies Act, 2013. Section 8 company is one of the best Non-profit organizations (NPO) because of its systematic constitutional framework. A Section 8 company intends to “promote commerce, science, art, education, sports, research, welfare, religion, social, protection of the environment, and charity.” The members of such a legal entity don’t get any dividend. Moreover, they have to use all income and profits only for the promotion of the company’s objective. In this article we described What are the Advantages and Disadvantages of Section 8 Company?

Section 8 companies are similar to Trust or Society except for one factor that is a section 8 company register itself under Central Government’s Ministry of Corporate Affairs. In contrast to, Trust or Societies which gets registered under State Government regulations. The prescribed meaning of Section 8 Company pertains to Section 8 of Companies Act, 2013, which also supports its objective. To establish a Section 8 company, one needs to acquire the license and its essential to follow the annual compliances with the Ministry of Corporate Affairs (MCA) for the smooth operation of the company.

Annual Compliance of Section 8 Company

A Section 8 company must adhere to the annual compliance levied by RoC and Income tax authorities as failure to meet the requirements can result in hefty penalties, i.e. up to 1 lakh a year. Let’s have a look at the immediate compliances that becomes applicable after registration of Section 8 company:  

• Appointing an Auditor within 30 days: A Section 8 company must appoint its first Auditor within 30 days from the date company’s incorporation to take account of all the company’s financial filings yearly.    
• Conduct a meeting for the Board of Directors: A Section 8 company must conduct the first Board of Directors meeting within 30 days from its date of incorporation. After that, the Board of Directors shall have one meeting within every six months of the calendar.
• An Annual General Meeting within nine months: A Section 8 company requires to have its first Annual General Meeting (AGM) within nine months from the closing date of its first financial year.

Importance of Annual Compliance

 The annual compliances play a significant part in the swift functioning of Section 8 company. Here are the reasons that justify the importance of annual compliance:

• Lucidity in the company’s operations: By enumerating the filings of financial returns and annul returns, the company gets a clear picture of its financial condition, which helps in further operations of the company.  
• Better credibility: When companies file compliances on time, it improves their credit. Such companies can easily avail financial help and market credit from the concerned authority.
• Builds more trust: Everyone trusts that company who displays its financial situation in detail. Filing compliance not only strengthens their credibility among everybody but also improves the company’s market value.

If a company don’t strictly follow the annual compliances of Section 8, then it might have to face some legal repercussions. Therefore, it’s advisable to fulfil the requirements of compliances on time to evade any legal complications in the future.

Advantages of Section 8 Company

 A section 8 company yields an array of Advantages, unlike a Society or Trust. Following is the list of advantages for companies registered under Section 8:

• Tax benefits:  Since Section 8 companies are a non-profit organization, so they leverage the exemption from the provision of income tax. The companies also get various other tax benefits and deductions. They employ many perks under section 80G of the Income Tax Act.
• Zero Stamp Duty: A Section 8 company do not have to pay stamp duty on the AoA and MoA of the private or public limited company which other companies surely pays.  
• The ease at transferring ownership/title:  The limited liability companies don’t have the advantages to transfer their title or ownership, but the Income Tax Act, 1961 does not confide Section 8 companies to transfer their ownership or title thereby, enabling the transfer of both movable and immovable interest without any hurdles or restrictions.
• Minimal share capital:  Unlike the other limited companies like public, private, or one person, a Section 8 company do not need much share capital to set up the entity. The members can directly use the funds from their subscriptions or donations.  
• Exempted from any name: In opposes to other companies who are under obligation to use their company’s name as ‘limited company’, section 8  companies get exempted from the use of any title. Thus, they can perform their functions without updating the public about their limited liability status.
• Separate legal entity: Section 8 company has a distinct legal entity which means the company’s existence is different from its members. The company has a perpetual existence along with greater flexibility.

Disadvantages of Section 8 Company

Following are the drawbacks that every company registered under Section 8 has to bear:

• No distribution of profits: The members of a Section 8 company cannot share the profits amongst them. The profits get used only for the welfare of the company’s objective, which revolves around the advancement of art, science, commerce, sports, environmental protection and fields of such sort.
• Amendment in MOA and AOA: Such an entity cannot amend or alter the Memorandum of Association or the Articles of Association without having the approval of the Central Government beforehand.
• Zero benefits:  The members of a Section 8 company gets zero benefits or any perks out of the company. They can afford to reimburse for their pocket expenses that may have occurred during the course.
• Limited objective: The central objective of Section 8 companies is to use the income and profits of the company in promoting some particular fields only and not for any other purpose.
• Multiple rules and regulations: The Central Government imposes many compliances on Section 8 companies. All the rules and regulations must include in the Memorandum of Association and Articles of Association.

Also, Read: How much fees is required for Section 8 Company Registration in India?