Nikita Sayam, Writer & Lawyer, Kaden Boriss India
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Non-Governmental Organisations (NGOs) include organizations engaged in public service, based on ethical, cultural, social, economic, political, religious, spiritual, philanthropic or scientific & technological considerations. They are voluntary organizations having a legal entity (registered) which include formal as well as informal groups with defined aims and objectives. They are private in nature and are self-governing, i.e. separate from and not controlled by the Government. NGOs do not return profits generated to their owners or directors. They operate with their own fund and with the funds raised through its volunteers or through donation for a social cause.
For the sake of brevity, in the Indian context, we shall be discussing only the following prominent and leading options/vehicles for setting up an NGO:
3. Non-profit Company (Section 8 Company)
A trust can be formed either as a private or a public trust. Formation of a private trust is governed by the Indian Trust Act, 1882 (“ITRA”). However, the ITRA does not govern trusts of public charitable nature. Public trusts are governed and registered by general laws of India and the Public Trust Act, if it is in force in the state in which the trust is proposed to be registered. A public charitable trust may be formed by any juristic person competent to contract or by any such person who has the power of disposition over a property and the capacity to create a trust for such property. Under Indian law, legal ownership of trust property vests in the trustees.
To form a public charitable trust, it is very important that the objects of the trust must be charitable in nature and to engage in activities for general public utility. Formation of trust requires a trust deed, which must contain objects of the trust.
Advantages of forming a charitable Trust
(i) A public charitable trust may be formed by any person competent to contract.
(ii) The management of the trust is done by trustees. Trustees generally hold office for life.
(iii) Minimum number of members required in a trust is two.
(iv) A trust’s everyday functioning can be done by a single trustee who is also known as the settlor.
(v) Trust income is exempted from income tax but a certificate under section 12A has to be obtained for availing such exemption.
(vi) Foreign contributions are allowed subject to the provisions of the Foreign Contribution Regulation Act, 2010 (FCRA).
Disadvantages of forming a charitable Trust
(i) A trust, unlike a company or a society, has no independent legal existence. In the event of any breach of trust, it is the trustees who are held jointly and severally (individually) liable, and not the trust as an entity.
(ii) The liability of the trustees is unlimited; unless it is specified in the trust deed that trustees are acting only in the capacity of trustees.
(iii) Registration is mandatory if the trust property has immovable property.
(iv) Public charitable trusts do not have a governing law at the central level.
(v) A public trust is subject to public scrutiny and court enquiry and direction, all the trustees, including a foreign trustee, would be subject to such public scrutiny and the jurisdiction of Indian courts.
(vi) While one trustee may be authorized by the other trustees to appear on their behalf for any court proceeding, any liability in respect of the trust (unless otherwise proved) will fall jointly and severally on all the trustees.
(vii) While there is no specific bar in law against a foreign national serving on the board of trustees of a public trust registered in India, there is a degree of sensitivity regarding the grant of approval for acceptance of foreign contributions under the FCRA.
(viii) In trust an individual member can be held liable for debts. They lack the structural assurance for large scale activities or funding.
Seven or more persons are entitled to form a registered society under the Societies Registration Act, 1860. The organization so formed must be registered to carry out literary, scientific or charitable activities. When a charitable organisation intends to have an open participation of large number of people in its functioning and decision making, it is advisable to be registered as a society.
Advantages of forming a Society
(i) It gives a corporate appearance to the organization, and provides greater flexibility as it is easier to amend the memorandum and bye laws of the society than in case of trust, terms of which are strictly manifested in the trust deed.
(ii) Societies are legal entities and the assets of members cannot be confiscated to meet its liabilities.
(iii) The management of a society is done by a Governing Body.
(iv) A society can be easily wound up if three-fifths of the members so desire.
(v) Societies have a democratic setup requiring the election of a governing council and all decisions are made by a vote.
(vi) Simple process of registration.
(vii) Simple record-keeping and even simpler regulations.
(viii) Income of a society is exempted from income tax but a certificate under section 12A has to be obtained for availing such exemption.
(ix) Foreign contributions are allowed subject to the provisions of the Foreign Contribution Regulation Act, 2010 (FCRA).
Disadvantages of forming a Society
(i) Possibility of a power struggle in society as they have democratic system.
(ii) The members of society hold office for a period of time and may stand for re-election.
(iii) As a charitable institutional form, in essence inappropriate for profit, financially sustainable strategic goal of finance operations.
(iv) No system of equity investment or ownership, thereby, making it less attractive for commercial investors interested in microfinance.
3. NON-PROFIT COMPANY
Section 8 of the Companies Act, 2013 permits a company to register itself as a not-for-profit company with limited liability to its members. An association formed under Section 8 has the status of a body corporate or a limited company. It is registered under the Companies Act and is recognized as an independent entity. As it is a separate legal entity, the property of a Section 8 company vests in the company and law suits can be filed against the company itself. The members of the management committee enjoy similar powers as that of the Board of Directors. It is not necessary for a Section 8 company limited by guarantee, to have any share capital.
The basic document provided for the formation of a non-profit company is Memorandum of Association and Articles of Association.
Advantages of forming a Non-profit Company
(i) The shares and other interest of any member in the Company shall be a movable property and can be easily transferred in the manner provided by the Articles.
(ii) These companies can be formed with or without share capital, in case they are formed without capital, the necessary funds for carrying the business are brought in form of donations, subscriptions from members and general public.
(iii) Non-profit companies have many privileges and exemptions, under Company Law and under Stamp duty for registration.
Disadvantages of forming a Non-profit Company
(i) The formation of a non-profit company is a little difficult due to a complex legal procedure.
(ii) Re-amendment or modification of objects is also difficult and complicated due to complex legal procedure.
(iii) In regards to selection of a name prior approval from Registrar of Companies is required.
(iv) The statutory meetings in non-profit company are quite extensive as they are to be done in accordance with the provision of the Company Act, 2013.
(v) In these company, no member shall be appointed as a remunerated officer.
(vi) In such company no remuneration / benefit will be paid to a member being a servant / officer of the Company (except reimbursement of out of pocket expenses, reasonable interest on money lent or reasonable rent on the premises).
(vii) A non-profit company cannot alter the provisions of its memorandum or articles except with the previous approval of the Central Government.
NOTE: The above types of organizations have not been examined from a tax perspective. It is advisable to approach a tax consultant for the same.
Keeping in mind the above advantages and disadvantages, we recommend that formation of a society would be the most suitable route for your purpose. The procedure for registration of societies at the all India level and at the international level has been explained below.
REGISTRATION OF SOCIETY
Societies Registration Act, 1860
o Any seven or more persons.
o Associated for any literary, scientific, or charitable purpose or other purpose listed under Sec. 20.
o Requisite documentation with Registrar of Societies (State).
• Permitted purposes: listed under Sec. 20.
o Charitable societies
o Military orphan funds or societies established at the several presidencies of India
o Societies established for the promotion of science, literature, or the fine arts
o For instruction, the diffusion of useful knowledge, the diffusion of political education,
o The foundation or maintenance of libraries or reading-rooms for general use among the members or open to the public or public museums and galleries of paintings and other works of art, collections of natural history, mechanical and philosophical inventions, instruments, or designs.
• Documents for registration:
o Request letter to register a society under Societies Registration Act 1860
o Two sets of Memorandum of Association (MoA) including List of Proposed governing body & list of desired persons (founder members of the society) – All pages to be signed by atleast seven members. Desirous persons or the person subscribing the names of the memorandum should not be (in any case) less than seven. If it is proposed to give all India character to the society there must be minimum of eight different persons from different States of Indian Union to the memorandum.
Memorandum of Association must contain:
o The name of the society;
o The objects of the society;
o The names, addresses, and occupations of the governors, council, directors, committee, or other governing body to whom by the rules of the society, the management of its affairs is entrusted.
o Two sets of Rules & Regulations framed for the functioning of the society.
o Affidavits (on ten rupees stamp paper from President/Secretary society regarding the name/ title of the society.
o Copy of residence proof of all desirous persons.
o Proof of ownership of the registered office of the society and no objection certificate (on ten rupees stamp paper) .
o A copy of the report of the proceedings of the General meeting at which the registration of the Society was resolved.
• Scope of operation (international registration):
The Societies Registration Act does not prescribe territorial limits to a society’s operations. Societies are free to venture beyond Indian boundaries subject however to the laws of the destination/target country. The idea behind this is to have legitimate legal existence in countries where the society is working. Just as international societies (NGOs like Greenpeace) have to register in India (by way of trust, society or company), Indian societies must be registered according to the laws of the country where they plan to work.
For instance, CRY i.e. Child Rights and You is an Indian trust having partners in USA and UK which are separately registered in those respective countries as CRY USA and CRY UK. Another example is Asha, an Indian NGO that works with ASHA USA, a registered charity in USA that collects funds on behalf of Asha India.
Research Note prepared by – For any clarifications please email Ms. Nikita Sayam, Associate Advocate on firstname.lastname@example.org
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