Forms of Legal Incorporation of Non Profit Organizations By CA R.Durai Rengaswamy Partner Sambandam Associates Chennai 1
INTRODUCTION Non Profit Organizations (NPO) has been involved for supporting good causes and carrying out charitable activities. NPO Sector form an integral part of community development. The NPO s plays a vital role in the community, while managing and organizing developmental activities. In the last few decades the role of NPO s has shifted from charitable mode to development mode. It is very important that a NPO has a clear Vision on its role for the community or beneficiaries. A vision statement is sometimes called a picture of the organization providing a road map for the future, but it s so much more than that. The vision statement is the inspiration, the framework for all strategic planning that the organisation puts into place to help it in its endeavors to attain its objectives. NPO s are value based organizations promoting the cause of the poor and needy. Hence their activities are focused towards the development of disadvantaged sections of the society. NPO s are accountable to various stakeholders such as the Community at large, target groups, funding partners, Government and Governing structures of the organization itself. NPO s are called in common parlance as Social welfare organizations, Educational institutions, Health Organizations, Technical and Vocational Training institutions and Development Organizations. CONSTITUTION OF A NOT FOR PROFIT ENTITY. Any group which is desirous of carrying out voluntary or charitable work shall incorporate a legal body. Once a legal body is incorporated it becomes a legal person and can acquire or hold property and can sue and be sued. There is a need for a legal entity to derive benefits under other than incorporation laws. Advantages of incorporation or registration as a legal body are: gives a legal right to the members to hold property in the name of the organization, implying that the legal body can sue and be sued in its own name, and not in the names of the members, any property held can pass from one generation to another without having to pay any transfer fees or taxes /without complicated documentation, 2
the properties of an incorporated body can be more easily protected from rival claimants and resulting litigations, Numerous benefits like e.g., exemption from various tax laws, land ceiling regulations, approval from the Government, etc., other special regulations like Foreign Contribution (Regulation) Act, 2010 and the Income Tax Act, 1961 are more easily granted if the organization is incorporated as a legal body. The document constituting the NPO is determined necessararily by the statute under which the NPO is incorporated. FORMS OF INCORPORATION The Vision and Mission statements are the primary documents that would help in establishing the objects clause and also be an indicator towards specifying its operational aspects. There are generally three forms of registration in India for incorporating a Non Profit Organization (NPO). They are as follows: Societies under the Societies Registration Act Central or respective government. Public Trusts registered under the Indian Trust Act 1882. Non Profit companies registered under Section 8 of the Companies Act 2013 (Formerly Section 25 company under the Companies Act 1956). A brief outline on the various enactments that constitute an NPO is given below. 1. Societies Registration Act (Central/State) Societies Registration Act is an All India Act and each state in India has its respective enactment for this purpose and societies registered in these states come under the purview of the respective enactments. 3
A society is formed when any seven or more persons associate for such of those purposes specified in Section 20 of the Societies Registration Act 1860 and subscribe to the memorandum of association of the proposed society. This memorandum along with the byelaws or the rules and regulations governing the society duly signed by the subscribers to the memorandum or their representatives from amongst the signatories is filed with the Registrar of societies. The Registrar after due scrutiny approves the registration by way of a certificate issued under his name. The memorandum contains particulars of the name of the society, location of the registered office, its objects, the names address and occupations of the proposed list of governing body members of the society to whom the management of affairs is entrusted. The byelaws contain details of the rules and regulations governing the conduct of affairs of the society, including the conduct of its meetings, elections to various offices in management, maintaining minutes book for Governing body meetings and General Body meetings including Annual general Meeting, operation of bank accounts, audit of the books of accounts, method of dissolution and disposal of the assets of the society on such an eventuality happening. The Societies Act requires the governing body of the society to ensure that the books of accounts are audited by duly appointed auditors, that an annual general meeting is convened, that an annual statement of the governing body members is filed with the Registrar under whose jurisdiction the society is registered. The following documents are filed with the Registrar of Societies after the AGM within 6 months from the date of conclusion of AGM or 31 st of March of each year whichever is earlier under the Tamilnadu Societies Registration Act 1975. a. Copy of the Annual General Body Minutes b. Letter of Declaration of the Society about its operation in accordance with the Memorandum of Association and Rules and Regulations of the Society during that financial year. c. Letter of Declaration under Rule 20 for verification of Accounts, Returns and Registers. d. Form NO.VI showing the list of Register of Members of the Committee with respect to the name, address and occupation. e. An authenticated copy of Balance Sheet, Income and Expenditure Account& Receipts and Payments Account of the Society for the relevant period (31st March) along with the Auditor s Report. 4
The respective state law requirements shall be complied for filing annual returns and renewals 2. The Indian Trusts Act 1882 The Indian Trust Act applies only to private trusts. Public and private, religious or charitable endowments have been expressly excluded from the operation of the act. Some of the provisions of the Act, have, however, been applied by analogy to trusts other than private trusts in circumstances where no special differentiation was called for. Section 3 defines the trust as an obligation annexed to the ownership of property arising out of a confidence reposed in and accepted by the owner or declared and accepted by him for the benefit of another and the owner. In order to be valid, a trust shall be declared by a non-testamentary instrument in writing by the author of the Trust. The requisites of a Trust are as follows: The existence of the author/creator/settler/donor of the Trust indicating with reasonable certainty by words or acts and intention on his part to create a trust. Trustees Beneficiary The Trust Property A Trust is an obligation annexed to the ownership of a specific property not with reference to a non-existent property There must be a divesting of the ownership by the author of the Trust in favour of beneficiary or Trustee. Fundamental Requirements are: Declaration should be binding on the settler Divesting of the ownership of the Trust property by the settler and setting apart the same 5
A statement of the objects for which property is thereafter to be held One of the main condition precedent for a Trust to be for charitable purpose is that the beneficiary should be general public and the objects should not be such as resulting in private gains. An object beneficial to a section of the public is also an object of general public utility. The manner and mode of disposal of trust property in the event of the dissolution of the trust. The deed of trust is registered with the Registrar under whose jurisdiction the trust is created. The Trust Act however does not provide for monitoring the activities of the trust by means of direction to the author or the trustees to file periodic reports on the activities and administration of the Trust with the registering authority. A trust shall not fail for want of a trustee. A trust shall not fail because of the death of the persons named as trustees, or on their refusal to act; the court will provide a trustee (section 73 and 74 of Indian Trusts Act) or it may itself assume the office of a trustee. A trustee is bound to deal with the trust property as a man of ordinary prudence would deal with it as if it were his own. A trustee is bound to maintain and defend the trust property. A trustee must keep and render clear and accurate accounts of the trust property. A trustee should invest the money which cannot be applied immediately as per the direction contained in the deed. A Trustee is not to mix trust funds with his own. Trustee shall not put himself/herself in a position where there is a conflict of interest. Once the objects are defined in original deed, founder / trustees have no legal authority to alter them. The objects or the powers cannot be changed by the trustees themselves and if the circumstances warrant such changes it has to be carried out with the approval of court. 6
It is advisable to register the Trust deed and the trust deed should be presented for registration within four months of its execution in the Sub Registrar office. The Charitable and Religious Trust Act 1920 provides for seeking of information on the Trust and its activities by any interested or aggrieved person by application to the Court of Jurisdiction and the court may if it deems fit, warrant that the accounts of the Trust are subjected to audit and such audited financial statements with such other information as the court deem fits is placed before it for consideration of the persons seeking such information. In certain states like Maharashtra and Gujarat there is a Public Trusts Act and it is obligatory for the NPO s to register them and come under the supervision of the Charity Commissioner. Dual registration under the Societies act as well as under the Bombay Public Trusts Act is required where the Public Trusts Act is in vogue. 3. The Companies Act 2013. Section 8 of the Companies Act 2013 (formerly Section 25 of the Companies Act 1956) provides for the incorporation of a Company, subject to the approval and grant of a license by the Registrar, for the purpose of promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object subject to this entity intending to apply its profits or other income, if any, to promote its objects as specified above, and also prohibits the payment of dividend to its members, as a company with limited liability without the addition to its name the word Limited or Private Limited. It is to be noted that the company s objects should confirm to the requirement of promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object. If not the license will not be granted. It is therefore apparent that a company licensed under Section 8 of the Companies Act 2013 would be a NPO. 7
Unlike a Trust or a Society, the governance strictures of a Section 8 Company are very much embodied in the Companies Act 2013. The company is expected to maintain most of the statutory records that a normal company is expected to maintain in terms of members registers showing extent of liability, called and remaining to be called up, a record of the minutes of the Board of Directors and the General Body of the Company. The Company will also be expected to file periodic returns in terms of change in management etc. The Books of accounts have to be audited by statutory auditors appointed by the General Body at duly convened meetings and annual reports including the audited financial statements have to be filed with the MCA under whose jurisdiction the Company has been incorporated. The following are the steps involved in the incorporation of Section 8 company. Obtaining DIN for the proposed directors. Apply for name in Form INC 1 (Suggest six alternative names) After obtaining name approval, E-Form INC 12 has to be filed for issuance of license under section 8 of the Companies Act, 2013. Mandatory attachments to INC-12 are: Draft Memorandum of Association as per Form no. INC-13 Draft Articles of Association Declaration as per Form No. INC-14 Declaration as per Form No. INC-15 Estimated income and expenditure for next three years Approval/ concurrence/ NOC of the concerned authority are mandatory to be attached in case the company is regulated by such authority. Once the INC 12 is approved the, a license under Section 8 of the Companies Act, 2013 is issued in INC 16 and then applicant is required to file the following Incorporation Forms on MCA Portal in order to obtain Certificate of Incorporation. 8
INC-32- Simplified Proforma for Incorporating Company Electronically (SPICe) MOA and AOA Affidavit and declaration by first subscribers and directors Proof of office address-rent agreement Copy of the approval of the proposed name License issued in INC 16 Form INC 22 for registered office Any amendment in the Memorandum and bye laws of a company or society or the trust requires the prior approval of the Commissioner of Income Tax (exemptions). In the case of Section 8 the prior approval of the Registrar of Companies are required in form GNL-1 before it is amended and in the case of society the changes shall be filed with the Registrar of Societies who will certify the changes. The changes shall be passed by way of Special resolution in the case of company and society. In the case of Trust relating to objects clause it shall be through the approval of the court. GENERAL An NPO is first to be constituted either as a Trust or a Society or a Section 8 Company before it can seek registration for Income Tax recognition or FC registration. Hence determining the type of constitution is of primary importance. In the three options mentioned above the simplest in terms of incorporation would be that of a Trust, and then that of a Society and finally a section 8 Company. The compliance aspect under the companies act is huge and any lapses invite stiff penalties as well. Many a time, the NPO is constituted with ease of incorporation and least reporting requirements in mind. However this could in the long term result in lack of accountability in terms of transparency and reporting. A decision on the constitution of an NPO may be taken only after ensuring that transparency and accountability are part of the vision statement of the initiator, area of operation and other requirements. 9