Generally, social entrepreneurs and professionals have a very basic concern w.r.t. the type of entity for engaging in activities relating to charity i.e. whether such activity should be in the form of a trust or society or a company with charitable objects. The decision is taken based on the nature of activities, persons involved in decision-making process, accounting aspects, taxation aspects, etc. This article focuses on incorporation of company with charitable objects.
According to the provisions of Section 8 of the Companies Act, 2013 (the Act), following are the 3 conditions or restrictions on its activities of such company:
(i) the company’s objective shall include activities for promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
(ii) the company intends to apply its profits, if any, or other income in promoting its objects (as stated above); and
(iii) the company intends to prohibit the payment of any dividend to its members.
The Central Government issues a licence on such terms and conditions as it deems fit. Based on the licence, the company can be incorporated under Section 8 of the Act without addition to its name of the word “limited” or “private limited” as the case may be. This article provides a detailed compliance checklist for incorporation of companies with charitable objects (i.e. companies incorporated under Section 8 of the Act). The applicable provisions are Rules 8, 12 and 19 of the Companies (Incorporation) Rules, 2014 read with Section 8 of the Act. The entrepreneurs and professionals shall ensure compliance of the following provisions:
- Minimum number of directors.—If the company (under Section 8 of the Act) to be incorporated is a private company then minimum directors should be 2 and in case of public company, the minimum directors should be 3.
- Minimum number of members.—If the company (under Section 8 of the Act) to be incorporated is a private company then minimum members should be 2 and in case of public company, the minimum members should be 7. A partnership firm may be a member of company incorporated under Section 8 of the Act.
- Application for name.—The name of proposed company shall be considered undesirable, if: (i) it attracts the provisions of Section 3 of Emblems and Names (Prevention of Improper Use) Act, 1950; (ii) it includes the name of a trade mark registered or trade mark which is subject of an application for registration under Trade Marks Act, 1999 (unless the consent of owner or applicant for registration, of trade mark, as the case may be, has been obtained and produced by the promoters); (iii) it includes any word or words which are offensive to any section of the people; and (iv) it is identical with or too nearly resembles the name of LLP or company. Other provisions of Rule 8 of the Companies (Incorporation) Rules, 2014 shall also be complied with.
Under Rule 9 of the Companies (Incorporation) Rules, 2014, an application for reservation of name shall be made through RUN (Reserve Unique Name) web service (available at www.mca.gov.in). The name may either be approved or rejected, as the case may be, by the Registrar, Central Registration Centre after allowing resubmission of such application within 15 days for rectification of the defects, if any.
For the companies under Section 8 of the Act, the name shall include the words like foundation, forum, association, federation, chambers, confederation, council, electoral trust and the like, etc. [Rule 8(7) of the Companies (Incorporation) Rules, 2014].
The name including phrase “electoral trust” may be allowed for registration of companies to be formed under Section 8 of the Act, in accordance with the Electoral Trusts Scheme, 2013 notified by Central Board of Direct Taxes [Explanation to Rule 8(2)(b)(vi) of the Companies (Incorporation) Rules, 2014].
- Validity of name approved.—Once approved, the name is valid for 20 days from the date of approval [Section 4(5)(i) of the Act].
- Application for licence under Section 8 of the Companies Act.—After the name is approved, the promoters of the company shall apply for licence under Section 8 of the Act. The licence provides certain terms and conditions to be followed during the lifetime of the company. Such application shall be made to the Registrar of Companies (in whose jurisdiction the registered office of the proposed company is to be situated). Such application shall be made in e-Form INC-12 [Rule 19 of the Companies (Incorporation) Rules, 2014]. Following documents that are to be submitted with the said e-form:
Draft memorandum and articles of association (format provided in Form INC-13):
(i) declaration by practising profession that draft memorandum and articles of association have been drawn up in conformity with the provisions of Section 8 of the Act and Rules made thereunder (in Form INC-14);
(ii) estimate of the future annual income and expenditure of the company for next 3 years, specifying the sources of the income and the objects of the expenditure;
(iii) grounds on which the application is made;
(iv) brief description of proposed activity;
(v) statement of assets and liabilities;
(vi) declaration by each of the persons making the application in Form INC-15 i.e. a declaration that draft memorandum and articles of association have been drawn up in conformity with the provisions of Section 8 of the Act and Rules made thereunder;
(vii) list of promoters (name, address, DIN or Income Tax PAN);
(viii) list of proposed directors (name, address, DIN or Income Tax PAN); and
(ix) list of key managerial personnel (name, address, DIN or Income Tax PAN).
- Obtaining licence under Section 8 of the Companies Act.—The licence is granted by Central Government (powers delegated to the Registrar of Companies).
- Application for incorporation of company.— After obtaining licence under Section 8 of the Act, the promoters shall file an application for incorporation of the company in Form INC-32 (SPICe) along with following documents:
(i) memorandum and articles of association of the proposed company (incorporating the changes suggested by the Registrar of Companies at the time of issue of licence —as discussed above);
(ii) consent to act as a director (in Form DIR-2);
(iii) declaration by first director and subscribers of the proposed company (in Form INC-9);
(iv) declaration by practising professional (in Form INC-8);
(v) proof of registered office address [as provided in Rule 25 of the Companies (Incorporation) Rules, 2014];
(vi) indentify proof and residential proof of every subscribers of the proposed company;
(vii) pursuant to the recent amendment [i.e. Companies (Incorporation) Third Amendment Rules, 2019 dated 29-3-2019], the application for company incorporation shall be accompanied by e-Form Agile (INC-35) containing an application for registration of Goods and Services Tax Identification Number (Gstin), Employees’ State Insurance Corporation (ESIC) and Employees’ Provident Fund Organisation (EPFO).
- Certificate of Incorporation.— After review of e-form, information/proofs and documents, the Registrar, Central Registration Centre issues certificate of incorporation. Along with the certificate of incorporation, the Government also issues permanent account number (PAN) and tax deduction and collection account number (TAN) under the Income Tax Act.
- Opening of bank account and deposit of share subscription money.—The Board of Directors in their first meeting (or by circular resolution) shall decide to open the bank account of the company. The subscribers shall deposit the share subscription money in the company’s bank account (for the number of shares, we shall refer the subscription clause of the memorandum of association).
- Application for certificate of commencement of business.—A company (not being company limited by guarantee or unlimited company) shall not commence any business or exercise any borrowing powers unless a declaration is filed by director of the company within a period of 180 days of the date of incorporation of the company in e-Form INC 20-A with the Registrar of Companies. It is necessary to state that every subscriber to the memorandum of association has paid the value of the shares agreed to be taken by him on the date of making of such declaration. Section 10-A of the Act [as introduced by the Companies (Amendment) Ordinance, 2019]. Bank statement of the company shall be attached to the requisite e-form. The Registrar of Companies then issues certificate of commencement of business.
Generally, a company with charitable object (Section 8 company) is incorporated within 25 to 30 days. It is a time-bound process for incorporation of such company. After the name of such company is approved, there are 2 activities —application for licence under Section 8 and application for incorporation of the company. The company incorporation process also involves signing and execution of several documents at different stages.
* Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at email@example.com.