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Pankaj Tyagi
| Updated: 26 Mar, 2022 | Category: Section 8 Company

What is the Advantages and Disadvantages of Section 8 Company in India?

disadvantages of section 8 Company

The primary goal of the Section 8 Company is to serve charitable purposes. These companies fall under the Companies Act, 2013. Unlike other non-profit firms, Section 8 companies are transparent and productive on account of the constitutional framework. These companies aim to incentivize commerce, art, sports, science, welfare, research, social, religion, environmental protection, etc. The prevailing Act doesn’t allow these companies to allocate the profit to their members. Instead, the earned profit is utilized to promote the company’s objective. In this write-up, we will be discussing the pros and disadvantages of section 8 Company.

An Overview on the Section 8 Company

  • A company is deemed a Section 8 company when registered as anan NPO (Non-Profit Organization). It has a motive of advocating commerce, arts, charity, education, protection of the environment, social welfare, science, sports.
  • It is mandated to use the earned profits or other income for the promotion of these objectives. The income of such entities cannot be utilized for addressing dividends-based obligations.
  • Such entities secure registration from the Ministry of Corporate Affairs and are obligated to comply with the norms underpinned by the government.
  • As per the rules, failure to meet the underlying norms formulated by the Central Government may lead to the closure of the company on the orders of the government.
  • Also, stringent legal action shall come to effect against all the company’s members if the objects formulated by the company turns out to be bogus.

Advantages of Section 8 Company

A Section 8 Company renders various benefits, unlike its counterparts such as Trust or Society. Following is the list of viable benefits offered by the Section 8 companies:

Access to Tax benefits

Since Section 8 companies are more of a charitable institution, they have access to the various exemptions available under the IT Act. These companies are qualified to access multiple tax benefits and a tax cut. Section 80G of the Income Tax Act[1] rendered plenty of tax-related benefits to these companies.

Zero Stamp Duty

The Section 8 companies are not liable to pay stamp duty on the MOA and AOA, unlike other entities falling under the Companies Act, 2013.

Minimal share capital

Unlike private, public, or OPC, a Section 8 company can be set up without minimum paid-up share capital. These companies are allowed to alter their capital structure in accordance with their requirement later on.

Exempted from any name

Section 8 companies are not compelled to affix the term like Limited or Private Limited in their name. These entities are registered with limited liability.

Separate legal entity

Section 8 company possesses a distinct legal status which implies that entity’s existence is independent of its members. The section 8 entity has perpetual existence.

Improved Credibility

The flexible and transparent constitutional framework of Section 8 companies allows them to garner better credibility than other types of NGOs such as Society and trust.

Eligible for foreign contribution

Section 8 companies are eligible to receive overseas funds in donations provided they are registered under the Foreign Contribution Regulation Act, 2010. This helps them fuel their charitable campaigns that are in need of much-need findings.

Disadvantages of Section 8 Company

Following are the common disadvantages of section 8 Company

Profit distribution is not permissible

Unlike private, public, and OPC, Section 8 companies do not have the leverage to undertake profit distribution and allocate fair share to the members. The profit earned by these companies can only be used to serve charitable objectives.

Profit cannot be a prime objective

Under no circumstances section 8 companies cannot serve profit-based objectives. However, they are free to generate income from legitimate sources or via donations. It is needless to mention that such gains can only be used to promote charitable objectives.

Presence of stringent compliances and norms

Section 8 companies are bound to abide by various tedious compliances and norms to remain operational within the legal landscape. All such standards should be enclosed in the company’s charter documents such as MOA and AOA. The members of Section 8 entities have access to various benefits. Similarly, these members are also exposed to some unavoidable shortcomings.

Prohibition on appointing a member as a remunerated officer

Section 8 companies are not allowed to appoint a member as a remunerated officer. This condition has been clarified under the governing legislation.

Conclusion

Section 8 companies are typically formed to serve philanthropic objectives such as the promotion of art, culture, science, charity, etc. These companies encounter minimal legal hindrances regarding availing of legal status via registration. But the same is not true for the post-registration phase, as these companies have to abide by various legal implications that act as a barrier. No profit allocations to members and less stability are some common disadvantages of section 8 Company. However, on the taxation front, these companies have some advantages.

Pankaj Tyagi

Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.

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