Section 8 of Company Law: Features, Formation, Advantages & Disadvantages

What is a Section 8 Company?

Section 8 Companies are also known as Non-Profit Organizations (NPOs) and are a kind of company registered under Section 8 of the Companies Act, 2013. Such companies are formed to promote commerce, art, science, sports, charity, education, social welfare, protection of the environment, or any other similar objectives. The primary objective of Section 8 companies is not to make profits but rather to contribute to social welfare.

Section 2(20) of the Companies Act 2013 states the meaning of a company as “Company means the incorporation of a company by association of different persons under the laws established by the Companies Act, 2013 or any other previous company act.” Section 8 Company is a type of company under the Companies Act, 2013. There is a motive behind the formation of any company, a company that is not formed for any profit making is called a Non-Profit Organization (NPO). In our country, any company that is registered as an NPO is also called a Section 8 Company.

Geeky Takeaways:

• Section 8 Companies can be defined as companies that have a reason and will to promote arts and culture, wildlife, education, sports, trade and commerce, and any other similar activity.
• Any company that falls under the category of Non-Profit Organization (NPO) must use all the profits and any form of revenue to promote these aspects only. Section 8 companies are exempted from the rules of paying dividends to their members.
• The rules of the Companies Act, 2013 by the Ministry of Corporate Affairs and Offices of Registrar of Companies govern the Non-Profit Organization (NPO)/ Section 8 Company in our country.

Key Takeaways:

• Section 8 Companies can be defined as companies that have a reason and will to promote arts and culture, wildlife, education, sports, trade and commerce, and any other similar activity.
• Any company that falls under the category of Non-Profit Organization (NPO) must use all the profits and any form of revenue to promote these aspects only. Section 8 companies are exempted from the rules of paying dividends to their members.
• The rules of the Companies Act, 2013 by the Ministry of Corporate Affairs and Offices of Registrar of Companies govern the Non-Profit Organization (NPO)/ Section 8 Company in our country.

Features of Section 8 Company

There are various features of Section 8 company which is not available to other companies as per the Companies Act 2013.

1. Objective: The objective of Section 8 Company is only to promote various types of activities in the country. This company does not have the objective of earning profit by the business, unlike other businesses.

2. No Minimum Capital: As per the Companies Act, 2013 there is no minimum capital that is required to form a Section 8 Company.

3. Limited Liability: The members of these companies are only accountable for the acts of the company to a certain level. Members of Section 8 Company cannot be made personally liable for any act done by the company.

4. Government License: The company must obtain the license for their practice from the central government or as per the rules established by them. These companies are there for a cause, and if the government thinks that they are not doing their part effectively then the government can also take their license back.

5. Privileges: The Companies Act, 2013 provides various benefits and exemptions to Section 8 Companies as these are formed for a social cause.

6. Less Stamp Duty and Tax Benefits: The government imposes a very minimal amount of stamp duty in case of incorporation of a Section 8 Company. These companies also avail various tax benefits as per the Companies Act, 2013.

Formation of Section 8 Company

The Incorporation process of Section 8 Companies and other companies are very much alike. The one thing that is very important while forming a Section 8 Company is the intention behind the incorporation. The member or a group of members can apply to the registrar of the company with the intention that they want to register the company under Section 8 of the act. When the registrar of the company and the central government are satisfied with the intention of incorporation, then they register the company as a Section 8 Company after the companies pay all the necessary fees and expenses.

It is necessary that a minimum of two directors were there if they want to register their company as a Section 8 Company. All the Section 8 Companies are limited companies, but they do not need to add ‘Limited’ with their name, but all the other rules of limited companies will apply to them. As these companies are allowed by the central government to register under Section 8 Company; hence, they are not allowed to amend their articles without the proper permission of the central government.

Cancellation of License

The Central government issues licenses to companies that register themselves under Section 8 of the Companies Act, 2013. These licenses given to them are on a condition, and if the company is not following the prerequisites, then the central government can revoke such licenses given to them.

There are certain conditions under which the central government can revoke the license given to a Section 8 Company.

• If the company is not following the terms and conditions based on which it was registered, then the central government can cancel the license.
• If the company is not following the conditions mentioned under Section 8 of the act, then the central government can cancel the license.
• The central government can also cancel the license of a Section 8 Company if it’s doing some fraudulent activity or doing some acts that are against public policy.

Winding up of Section 8 Company

Companies registered under Section 8 of the Act can apply for Winding up the company on their own as per the rules of the act, and the government can order such company to wind up if they find any issues in the operation of such company. After this process, the registrar will remove the name of the company from the register of the company as per Section 248 of the Companies Act 2013. The authority will dispose of their debts and liabilities, and if any assets of the company remain after that, then they can order to amalgamate such assets in a similar company. They can also order to sell these assets and submit all the amount generated from that in the government fund.

Punishment for Contravention

If the government finds that the company is doing any fraudulent activity and not following the articles of the company, then the government has the power to revoke its license. Also, according to Section 8 (11) of the Companies Act 2013 if the company is not following the requirements given in Section 8, then the government can impose a fine of a minimum of ₹10 Lakhs that can be extended to ₹1 Crore. Also, the directors and the members of the company will be liable if they are part of such activity, the punishment for these members is imprisonment for up to 3 years and a fine between 25 thousand to 25 lakhs.

Advantages and Disadvantages of Section 8 Company

Advantages of Section 8 Company

People usually create Section 8 Companies instead of any NGO and association because Section 8 Companies have various benefits. Some of the benefits are discussed below:

• The members of these companies are only accountable for the acts of the company to a certain level.
• As per the provisions of the Companies Act, 2013, there is no minimum capital that is required to form a Section 8 Company.
• Section 8 Company is a separate legal entity with its own existence, so its members and directors cannot be made liable for any ultra vires act of the company.
• Section 8 Companies do not have to follow all the compliances that a general company registered under the Companies Act, 2013 has to follow.
• Section 8 Companies have various tax benefits, and their stamp duty charges are also less compared to other companies.
• Section 8 Companies have a license from the central government, so they have more credibility than other organizations.

Disadvantages of Section 8 Company

Section 8 companies cannot use the profit earned in any other way that is prescribed by the law and the articles.

• The government always keep a strong check on these organizations as they provide them with various benefits.
• The directors and members of Section 8 companies do not have the power to use the profit of the company.
• The government can revoke the license of a Section 8 Company on various grounds.
• The company incorporated under Section 8 has to get permission from the central government for their articles.

Conclusion

There are various types of companies under the Companies Act, 2013, and Section 8 Company is one of them. These companies are essential for creating the balance in the society as they work towards the goal of making the society a better place. The government of the country supports them because all the companies registered as per Section 8 of the act, work for a noble cause in a different sector.

Section 8 of Company Law – FAQs

What is Section 8 Companies under the Companies Act, 2013?

Section 8 Companies are a non-profit organization that works for the benefit of society and are registered under Section 8 of the Companies Act 2013.

Which Company can be registered as a Section 8 Company?

Only a limited company can be registered as a Section 8 Company.

Can a One-Person Company (OPC) be incorporated as a Section 8 Company?

No, a one-person company (OPC) cannot be incorporated as a Section 8 Company.

Can a Section 8 company alter its objects?

Yes, section 8 company can alter its objects after obtaining the due permission from the authorities and their shareholders.

How much time, does it take to register a Section 8 company?

The government has made the system of registration of all companies online, and because of that, it takes only 10-15 working days to register a company if all the documents are valid and updated.

Reference:

• Ministry of Corporate Affairs
• India Code

Note: The information provided is sourced from various websites and collected data; if discrepancies are identified, kindly reach out to us through comments for prompt correction.