
Before we jump on to process of registration of a non-profit organisation, let us understand what is a Non-Profit Organisation, what sort of activities are generally covered in it etc.
What is a Non-Profit Organisation (NPO)?
A Non-Profit Organisation, also know as “Not for Profit” organisation or “Non-Business” entity of “Non-Government” Organization (NGO) is a legal entity formed and operated for a common, public or social cause but not for earning profit. Any income in excess of expenditure is not distributed among owners/members rather it is kept for future expenses of organization’s purpose.
Since the purpose is not to earn profit, in most countries approved Non-Profit Organizations are given tax relief in form of tax exemption and/or tax-deductible contributions.
Non-Profit Organization generally work for promotion of art, commerce, science, education, social welfare, religion, sport, environment protection or other similar objectives.
What is the legal structure of a Non-Profit Organisation in India?
There are 3 ways in which Non-Profit Organizations (NPOs) can be registered in India:
- Trust
- Society
- Section 8 Company
Above 3 structures are governed under different laws in India and has different features. Any Non-Profit Organization (NPO) in India is free to choose any one of the above structures.
Meaning of above mentioned NPO structures
Meaning of Trust
According to the Indian Trusts Act, 1882, A “trust” is an obligation annexed to the ownership of the 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;
In simple words, the owner of the property or assets, called the ‘author of the trust’, entitles its ‘trustee’ to hold his property or assets, for the benefits of beneficiaries or authors and beneficiaries.
‘Author of the trust’ entrusts the ‘trustees’ to hold the property of the Trust for the benefit of beneficiaries OR beneficiaries and authors. For this purpose, Trustee’s interest in property of the trust is called as “beneficial interest” in the trust.
Every trust must have a purpose for which it is established.
Meaning of Society
Societies are registered under the Societies Act 1860, while this Act is applicable throughout the India, many states in India have state level laws for registration of societies like “The Karnataka Societies Registration Act, 1960”, “The Societies Registration (Odisha Amendment) Bill, 2021” etc. The state level laws are mostly amended form of national level law.
The Societies can be registered to operate on state or national level with objective to promote education, charity, religion, social welfare, art, music, literature, culture and political education.
Meaning of Section 8 Company
These organisations need registration under Section 8 of the Companies Act, 2013. These are non-profit organizations where an individual or an association of person choses to register the organization as a Company.
The primary objective of Section 8 companies is to promote arts, commerce, sports, education, science, social welfare, religion, research, charity, environment conservation and such other objects as prescribed by law. All the income, donations and grants earned by a section 8 Company, must be completely spent in the promotion of the prescribed objects only
Suitability
Let us briefly understand which structure is suitable for which NPO.
- Trust
- A Trust is generally formed when activities of NPO are run by family under the leadership of one member of the family (known as Trustee) and other family members trust on the leader for efficient conduct of the activities of the NPO.
- No need to hold election for the position of Trustee and Trustee can hold the position for any number of years.
- Trust is formed in a closely held environment and therefore it is easy to maintain privacy in activity.
- Society
- Formation of society is generally suitable where members want the elected body to manage the activities of the organisation.
- Society allows easy exit of its members; hence it is more suitable where members do not want to associate themselves with organisation in perpetuity.
- A society is easier to wind-up as compared to other two options, hence if ease of winding-up is one of the criteria then you may choose formation of Society.
- Section 8 Company
- If one wants to register a company to obtain a legal structure, then section 8 company is more suitable.
- This is considered to be more reliable and formal as the entity is central government approved.
- Generally, the organization that prefers to undertake multiple activities and in multiple geographies prefer to register as a Company.
Difference between the 3 types of organisations
Let us look at different between Trust, Society and Section 8 Company
Particulars | Trust | Society | Section 8 Company |
Meaning | Trust is the oldest form of structure for charitable organisations, wherein trust is made to holds ownership of assets on behalf of members. The concept is more popular for family run trust. | Society is a form wherein few people come together for common (mostly social) cause. | Sectio 8 company is established with the purpose of promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object. |
Governing law | Generally, Indian Trust Act, 1882 is applicable, unless state has its own laws like in states of Gujarat and Maharashtra | Societies Registration Act, 1860 | Companies Act, 2013 |
Registering Authority | Deputy Registrar of the state | Registrar or Deputy Registrar of the State | Registrar of Companies (ROC) |
Minimum members required | 2 Trustees | 7 members (5 members for Jammu & Kashmir and Telangana) | 2 directors and 2 shareholders (director and shareholders can be same) |
Annual Compliances | No annual compliances to be met | Annual filing containing details of managing committee members | Company is required to file annual return and accounts with Registrar of Companies (ROC). |
Who holds the right on assets | Trustee | Society | Company |
Preference in FCRA registration | Low preference | Low preference | Preferred |
Stamp Duty | Depends on state’s Stamp Duty Act and value of property involved. | None | None |
Cost involved | Low | Medium | High |
Conclusion
Now when you have understood the differences between the three types of non-profit organisations, namely, a trust, a society, and a Section 8 company, you can make an informed decision over the choice of the type of nonprofit entity you wish to establish, depending on your goals and objectives of your business etc. Once a particular form of non-profit objective is chosen, it should be registered with the same objective.
In addition to registration of a non-profit entity, engaged in certain activities, it may also require the licenses and registrations under the Shops & Establishment Act and FCRA registration for employing foreign staff.
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