Today, most people and organizations are working for the betterment of this world. They work in education, healthcare, social services, or environmental causes. Their motto is a need to help people. Of the many groups that work for society’s welfare, two types are most popular:
NGOs and Section 8 companies. Both aim to serve society. However, they differ in their legal structures, registration processes, and operating procedures. This blog informs people about the differences between NGOs and Section 8 companies.
What is an NGO?
NGOs are formed under certain laws, such as the Indian Trusts Act, of 1882, the Societies Registration Act, of 1860, or the Companies Act, of 2013. Above all, NGOs are nonprofit organizations.
Their primary focus is on helping the public and the communities instead of aiming to profit. But sometimes, NGOs also raise funds to support their causes and work.
The NGO registration process is critical. It gives an organization legal legitimacy. This process is crucial to legally recognize an NGO in society. NGO registration in Gurgaon and elsewhere in India requires proper steps. This includes filling out applications, submitting all documents, and completing other legal formalities.
What is a Section 8 company?
A Section 8 company is a type of not-for-profit company. It is formed under Section 8 of the Companies Act, 2013. It takes its name from this part of the Act. It lets companies promote one or more of these: arts, science, commerce, education, social welfare, religion, or any public benefit. Section 8 companies are like any other company, except for one thing. They cannot distribute any profits to their members or shareholders.
A Section 8 company has a unique legal status. It also has a formal way of working, like any other private company. The Section 8 companies’ profits must be for social goals only. Also, Section 8 companies have many benefits. These include exemptions under the Income Tax Act.
In India, one has to complete the NGO registration process, which includes specific legal steps, to form a Section 8 company. Section 8 companies are for charitable purposes. Their registration gives the organization the recognition and legitimacy it deserves.
Key Differences Between an NGO and a Section 8 Company
At first glance, an NGO and a Section 8 company look similar as they are non-profit organizations. But they differ on many points:
Legal Structure
- An NGO can be formed under various laws, like the Indian Trusts Act, the Societies Registration Act, or the Companies Act. It allows for choosing a structure that best fits an organization’s needs.
- Under the Companies Act, 2013, a Section 8 company is always incorporated. Its activities must fit into the Act’s rules for non-profits. Thus, a Section 8 company’s structure is more formal and restricted than that of an NGO.
Governance and Management
- An NGO’s governing body is sometimes a board of trustees. Otherwise, it is a governing council in a society. These bodies make oversight of an NGO’s activities more efficient. But its operations are more limited than others. Its governing body will be stricter about rules and procedures. These rules are usually relaxed for other NGOs.
- A Section 8 company runs like a corporation in its management and governance. In other words, the running and control of affairs are in the hands of directors. Decision-making also involves an official process for passing decisions, like in a private company. It carries on all aspects of running and controlling companies. This is through its incorporation process and the MOA and AOA.
Profit Distribution
- An NGO cannot share profits with members, trustees, or founders. There are no profits to share. We must plough back surpluses into activities or social use.
- A Section 8 company cannot provide dividends to its directors, members, or shareholders. We must reinvest earnings to fund social activities in our charter. But, in the legal books, it is still a company. So, it may need stricter accounts than a typical NGO.
Registration Process
- The type of entity you wish to be would determine the process of getting registered for an NGO. If you choose to be a trustee or a society, the process is simpler. It has fewer formalities and documents. But if you choose to be a company, the process would be like registering a Section 8 company.
- A Section 8 company must register under the Companies Act, 2013. It has a more complex process. One must file the MOA and AOA. Then, get a license from the central government. Finally, file many other documents with the RoC. It is a more cumbersome and time-consuming process than registering an NGO under a simpler law.
Tax Exemptions and Benefits
- NGOs registered under the Societies Registration Act or the Trusts Act can apply to the Income Tax Department for tax exemptions and charitable status.
- Section 8 companies enjoy equal tax benefits. But, they must follow company law and more corporate governance rules.
Which One is Better for You?
Choose an NGO or a Section 8 company based on your goals. It also depends on your desired structure and the work you will do.
- For a more informal approach, you could work with a few people. It would be more flexible; an NGO could be the answer. You will be able to form a trust or society as appropriate to your type of work.
- If you have a more formal, structured approach, then consider Section 8. It is for those with governance and legal frameworks like a company’s. Not only do more donors tend to give trust because it is more governed by a set of rules, but also because it is more transparent.
Conclusion
Both NGOs and Section 8 companies are essential to society. But they operate in different frameworks. An NGO can be flexible in its structure and operations. A Section 8 company will have a formal, company-like structure. Both organizations will enjoy tax benefits. They both focus on charity. To start a social welfare organization, the differences will guide you. They will show you the best way to your goal. Proper registration as an NGO is necessary. It will allow full legal recognition and enable its functions to benefit society.
Frequently Asked Questions
Yes, both NGOs and Section 8 companies are eligible for tax exemptions under the Income Tax Act, but they must follow the respective procedures for application and approval.
Yes, a Section 8 company can earn income, but the earnings must be used only for the organization’s charitable or non-profit objectives. It cannot distribute profits to its members or shareholders.
Yes, an NGO can be converted into a Section 8 company if needed, by following the legal process for company formation under the Companies Act.
Yes, a Section 8 company is managed by a board of directors, and it must follow corporate governance rules, including holding regular board meetings and filing necessary paperwork with the Registrar of Companies.