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This article centers on three types of organizations: Non-Governmental Organizations, commonly known as NGOs, often referred to as Non-Profit Organizations. NGOs typically establish themselves with the goal of promoting social welfare, advancing social development, and championing charitable causes.

In India, you can set up such an organization as a Trust, a Society, or a Section 8 Company. It’s crucial to note that these options serve distinct purposes and have different applications, depending on your goals for the organization’s establishment.

TRUST:-

The trust is the oldest type of non-profit organization, regulated by the Indian Trust Act, 1882. There are different types of trusts, such as public and private trusts, each serving distinct purposes. Public trusts benefit the general public, while private trusts cater to specific individuals or families. Setting up a trust requires a minimum of two individuals, and there’s no need for annual document filing, making it easy to establish and operate. However, the lack of regulatory oversight can make winding up a trust challenging since trusts are typically irrevocable.

SOCIETY:-

Societies are a more modern form of organization. Seven individuals from one state or eight from different states can form a society with common objectives. The Societies Registration Act, 1860, or its state-specific versions, govern Societies. Unlike trusts, societies have a more democratic structure with membership and elected bodies to manage them. Societies often need to file lists of governing body members annually, and some states require audited accounts filing. This form is suitable for those with state-level objectives who are willing to fulfill formalities.

SECTION 8 COMPANY:- 

Section 8 companies operate under the Companies Act 2013 and receive a special license from the government. The government grants them the authority to have limitations by shares or guarantee, with or without share capital. These companies must fulfill specific conditions, including forming for charitable purposes, utilizing income for these objectives, and refraining from paying dividends to members. Section 8 companies have the authorization to engage in microfinance activities, providing small-scale loans, and benefit from simplified registration for microfinance, as per RBI circulars.. They are exempt from obtaining an RBI Certificate of Registration for certain non-banking financial activities, within RBI-prescribed limits.

When Should You Think About Establishing a Society?

Consider forming a Society when you prefer having an elected body to oversee its operations. A Society is suitable if members want the option to leave without long-term commitments. If you’re looking for the easiest option to dissolve among Trusts, Section 8 companies, and Societies, then opt for forming a Society. Societies are generally simpler to close down compared to trusts and Section 8 companies.

When Should You Think About Establishing a Trust?

You should contemplate forming a Trust under these circumstances:

1. When multiple family members participate in managing the business.
2. If you prefer a trustee to serve for their lifetime without requiring elections.
3. When you value privacy in your activities and desire flexibility in distributing benefits.

Motives Behind Establishing a Section 8 Company

There are several reasons to consider forming a Section 8 Company:

1. If you aim to undertake a diverse set of activities.
2. To gain credibility and trust, as it receives official recognition from the central government.
3. To attain the legal status of a company without requiring a substantial initial capital investment.

Analysis of Differences:

1. Statute/Legislation: The Indian Trust Act, 1882, governs Trusts. Societies operate under the Societies Registration Act, 1860, with variations in different states. Section 8 Companies are regulated by the Indian Companies Act, 2013.

2. Prime Object/Activities: Trusts, Societies, and Section 8 Companies are all established for providing social benefits. The surplus generated cannot be diverted for any other purpose apart from fulfilling their objectives.

3. Nature of Control: Trusts typically have one person in control, such as the settlor, founder trustee, or a board of trustees. Societies make decisions through voting power, while Section 8 Companies are governed by a board of directors.

4. Jurisdiction: Deputy Registrars or Charity Commissioners of the relevant area register Trusts. The Registrar of Societies registered Societies, while the Regional Director and Registrar of Companies in the respective state register Section 8 Companies.

5. Main Documents: Trusts require a Trust Deed, Societies need a Memorandum of Association and Bye-Laws, and Section 8 Companies require a Memorandum of Association and Articles of Association.

6. Stamp Duty: People execute Trust Deeds on non-judicial stamp paper, with the specific amount varying by state. Memorandum and Bye-Laws of Societies and Section 8 Companies do not necessitate stamp papers.

7. Minimum Requirement: Trusts require a minimum of two trustees. Societies need at least seven members for state-level and eight members for multi-state operations. Section 8 Companies require a minimum of two directors and shareholders, which can be the same person.

8. Area of Activities: Trusts are applicable nationwide, regardless of the state where the trust deed is registered. Societies are confined to the state where they are formed, and Section 8 Companies have nationwide applicability.

9. Micro Finance Activities: Trusts and Societies cannot engage in microfinance activities. Section 8 Companies are permitted to undertake microfinance activities as per RBI guidelines.

10. Annual Compliances/Documentations: Trusts have no annual compliance requirements. Societies must annually file a list of managing committee members. Section 8 Companies must file annual returns and accounts with the Registrar of Companies.

11. Registration with Income Tax u/s. 12A & 80G as NGO: Trusts, Societies, and Section 8 Companies can register under these sections for tax benefits.

12. Borrowings: Trusts can borrow only from the author, Societies can borrow from their members, and Section 8 Companies can borrow from members, shareholders, banks, and institutions.

13. Possibility of Amendment: Trusts can amend through a supplementary trust deed. Societies find it relatively difficult as both the memorandum and bye-laws need amendment. Section 8 Companies have restricted amendments without the approval of the Central Government.

14. FCRA Registration: For FCRA registration, people moderately prefer Trusts, Societies, and Section 8 Companies.

15. Foreign Direct Investment: FDI is not permitted in Trusts, Societies, or Section 8 Companies.

16. Cost Efficiency & Transparency: Trusts and Societies have lower costs and are less transparent. Section 8 Companies have comparatively higher costs but are more transparent.

17. Winding-Up: Trusts are generally irrevocable, making winding up difficult but possible as per the trust deed. Societies and Section 8 Companies have specific procedures for winding up.

Which is the Optimal Choice: Trusts, Societies, or Section 8 Companies?

Choosing between Trusts, Societies, or Section 8 Companies depends on your specific goals. All these organizations are designed to provide social benefits, offer relief to the needy, and contribute to social welfare. They operate strictly within the boundaries set by their founding documents and cannot divert their surplus for other purposes since they are Non-Profit Organizations.

If you want to provide social benefits to individuals or families while ensuring the trustee serves for a lifetime without elections, a private trust might be suitable. For broader social welfare endeavors with structured governance through elected bodies, forming a society is ideal.

However, if your aim is to establish a legal company structure for social welfare, gain credibility, access government benefits and foreign contributions, maintain transparency, and possibly engage in microfinance activities, a Section 8 company is the best choice. The central government authorizes Section 8 companies and grants them benefits like exemption from RBI registration for specific non-banking financial activities, including microfinance.

In essence, there’s no one-size-fits-all answer; each organization type serves its purpose effectively. Your choice should align with your specific objectives and the scope of social benefit you intend to provide.

Read more – What is an NGO?

FAQs

1. What is the main difference between a Trust, a Society, and a Section 8 Company?

   – Trusts are managed by trustees and have a single governing body.

   – Societies have a more democratic structure with members and an elected body.

   – Section 8 Companies are regulated like regular companies but are dedicated to non-profit activities.

2. Can foreigners or non-Indian citizens be part of a Trust, Society, or Section 8 Company?

   – Trusts typically do not have restrictions on the nationality of trustees.

   – Societies may allow foreigners as members in some cases.

   – Section 8 Companies can have both Indian and foreign members.

3. How can I amend the objectives or rules of a Trust, Society, or Section 8 Company?

   – Trusts can be amended through a supplementary trust deed.

   – Societies and Section 8 Companies require changes to their governing documents and approval, which can be relatively complex.

4. Which one is more cost-effective, a Trust, Society, or Section 8 Company?

   – Trusts and Societies are generally lower in cost compared to Section 8 Companies, which have more regulatory compliance.

5. Can these organizations engage in microfinance activities?

   – Trusts and Societies cannot engage in microfinance activities.

   – Section 8 Companies are authorized to undertake microfinance activities as per RBI guidelines.

6. How can I wind up or dissolve a Trust, Society, or Section 8 Company?

   – The process for winding up differs for each, but all require specific legal procedures and approvals.

7. Are these organizations eligible for tax benefits?

   –  Trusts, societies and section 8 companies can register for tax benefits under sections like 12A and 80G for tax exemption.

8. Can these organizations receive foreign funding or grants?

   –  Trusts, societies and Section 8 companies can receive foreign contributions with proper registration under the Foreign Contribution Regulation Act (FCRA).

9. Do they have to file annual compliances or reports?

   –  Trusts generally have minimum annual compliance requirements.

   – Societies must file lists of governing body members annually.

   – Section 8 Companies must file annual returns and accounts with the Registrar of Companies.

10. Can they borrow money, and if so, from whom?

    – Trusts can typically borrow from the author.

    – Societies can borrow from their members.

    – Section 8 Companies can borrow from members, shareholders, banks, and institutions.