What is Section 8 Company? Advantages & Disadvantages

If charity and social service are what you want to do, your company must fall under Section 8 of the Companies Act 2013. These companies are primarily established for charitable purposes with no minimum share capital. Here are some more details about this to help you arrive at a decision quickly.

What is Section 8 Company?

A Section 8 company is established with the aim to promote education, art, commerce and entertainment. It is a non-profit organisation that contributes to the development of humans in different walks of life.

What are the features of a Section 8 Company? 

1. Established for social welfare: These companies are solely for the purpose of social welfare. It is developed to look into the needs of the people of a community.
2. No minimal capital: They don’t require minimal capital as others do. It can be decided by its shareholders. There are no limitations on capital.
3. Authorised by the government: They have the sanction of the government for all their processes and transactions. 
4. Donations: Their primary source of income is donations received from the public and different organisations.
5. Profit is used for the cause: Unlike in other companies, the amount acquired is not distributed among the members of the organisation but is used solely for its cause.
6. Suffixes are optional: They can choose to use or omit suffixes like ‘pvt ltd’.

Here are some of the advantages and disadvantages of a Section 8 company for a better understanding.

Advantages

1. Tax exemption: They have a 30% tax exemption because of being non-profit organisations.
2. No stamp duty: They don’t have to pay any stamp duty on the Memorandum of Association.
3. Easy ownership transfer: The process of transferring ownership is simple.
4. Less share capital: When compared to public and private entities, they need less share capital.
5. Separate entity status: They will be independent of their members.

Disadvantages

1. No share in profit: The profit isn’t shared among the members. It is used for the organisation.
2. Government approval: Amendments in the Memorandum of Association require prior government approval.
3. Zero independence: Rules set by the Central government have to be followed.
4. Restricted usage of funds: Funds can be used only for the specified purpose of the organisation.
5. The licence can be revoked: The Central government has the power to revoke a company’s licence at any time. 

Now you know everything you need to know about a Section 8 company. If the charity is on your mind, then it is the thing for you, but if you are looking for more options, check out our blog on trusts and societies.