When establishing non-profit organisations, the choice of legal structure is vital because it greatly affects how your organization's mission will be carried out. In India, among the frequently chosen choices are trusts, societies, and section 8 companies, each with particular characteristics and effects.
You must comprehend these procedures before you start the flurry of fundraising activity. You can use this blog as a reference as you weigh your alternatives and decide what will best serve your goals.
Understanding Trusts:
When a person, known as the "settlor" or "donor," distributes property or assets to a "trustee" for the benefit of a certain objective or beneficiary, the transfer constitutes the legal establishment of a trust. By the goals stated in the trust agreement, the trustee keeps and manages these assets. Trusts are frequently created with altruistic, benevolent, religious, or educational goals in mind.
Advantages of Trusts:
Disadvantages of Trusts:
A society, which is a legal body, can be created when a group of people band together for a shared, benevolent, artistic, or scientific goal. See the Societies Registration Act of 1860 for details on how societies are governed. A management committee or governing body is in charge of overseeing society operations and making decisions.
Advantages of Societies:
Disadvantages of Societies:
The Corporations Act of 2013 defines Section 8 companies as organizations established to further commerce, the arts, sciences, sports, education, research, social welfare, religion, charity giving, environmental preservation, or any other analogous objective. All of the money made by these companies is used to further the stated objectives; they were not founded for financial gain.
Advantages of Section 8 Companies:
Disadvantages of Section 8 Companies:
| Aspect | Trusts | Societies | Section 8 Companies |
|---|---|---|---|
| Legal Basis | Governed by Trusts Act | Governed by Societies Act | Governed by Companies Act |
| Formation | Created through a trust deed | Created through a memorandum of association and registration | Registered under Companies Act |
| Objective | Typically for charitable, religious, or philanthropic purposes | Generally formed for promoting science, literature, education, sports, etc. | Formed for promoting social welfare, commerce, art, science, research, education, etc. |
| Governing Body | Managed by Trustees | Managed by a Governing Body | Managed by a Board of Directors |
| Membership | No strict membership criteria | Members can be individuals or institutions | Shareholders as members; no strict membership criteria |
| Profit Distribution | Profits cannot be distributed to beneficiaries, used only for trust's objectives | Profits cannot be distributed to members, used only for society's objectives | Profits reinvested for the company's objectives; no distribution to members |
| Dissolution | Subject to the trust deed and legal provisions | Dissolution process defined by the society's rules and legal provisions | Dissolution process defined by the company's Articles of Association and legal provisions |
| Audit & Reporting | Limited legal obligations for auditing and reporting | Required to maintain accounts and submit annual reports | Strict auditing and reporting requirements under the Companies Act |
| Property Ownership | Trust owns the property | Society owns the property | Company owns its assets |
| Tax Benefits | Eligible for tax exemptions under Section 11 of the Income Tax Act | Eligible for tax exemptions under Section 12A of the Income Tax Act | Eligible for tax exemptions under Section 8 of the Income Tax Act |
| Name Restrictions | Relatively more freedom in choosing a name | Certain words and names may require prior approval | Certain words and names may require prior approval |
| Regulatory Authority | Registrar of Trusts | Registrar of Societies | Registrar of Companies |
| Fundraising | Limited avenues for fundraising | More flexibility in fundraising | Can raise funds through equity shares, dona |
The mission and purpose of your nonprofit play a pivotal role in choosing the right legal structure. Here are some considerations:
Your decision may be greatly influenced by the financing and resource options available:
Think about the degree of regulation and compliance that your company can handle:
Determine the advantages and likely tax effects of each structure:
Take into account the adaptability and administrative burden:
For people who are motivated by altruistic goals, trusts have traditionally been the preferred option. They are formal agreements in which assets are given to trustees for management in service of a certain goal or beneficiaries. Here are some details about what they have:
Case Study 1 - Tata Trusts
Tata Trusts, with its headquarters in Mumbai, Maharashtra, is a prime example of the ability of trusts to effect change. Tata Trusts have a significant influence across India with projects in the fields of healthcare, education, rural upliftment, water, reducing urban poverty, energy, innovation, and culture. They allocate funds wisely to causes that are consistent with their objectives.
Case Study 2 - Sparsha Trust
The crucial task of ending child exploitation has been taken on by the Bangalore, Karnataka-based Sparsha Trust. The trust exemplifies how trusts can tackle particular social concerns with committed efforts by offering safety, education, shelter, and skill development programmes.
Societies, another well-liked legal framework, place a strong emphasis on cooperation and community involvement. They are made up of individuals who come together to work towards a shared objective while addressing societal issues. Let's examine the main traits of societies:
Case Study 1 - Desire Society
Desire Society, based in Hyderabad, Telangana, is an example of how societies may approach delicate situations. Desire Society exemplifies how group efforts may produce large-good changes by providing education, treatment, food, and housing to children impacted by HIV/AIDS.
Case Study 2 - Pratham Education Foundation
Pratham Education Foundation, operating in Delhi, Delhi, is committed to providing education and skill development to vulnerable children and youth from marginalized sections of society. Through direct intervention in schools and participation in Government initiatives, Pratham illustrates the role Societies play in education and empowerment.
Section 8 Companies, governed by the Companies Act, 2013, are established for promoting various charitable and social objectives. They combine the principles of a company structure with the objectives of a nonprofit organization. Here's a closer look at their characteristics:
Case Study 1 - Access Life Assistance Foundation
Based in Mumbai, Maharashtra, Access Life Assistance Foundation showcases the versatility of Section 8 Companies. By providing support to families with pediatric cancer patients, along with educational and recreational enrichment for children, Access Life demonstrates how this structure can bridge social impact and sustainability.
Case Study 2 - Foster and Forge Foundation
Foster and Forge Foundation, located in Noida, Uttar Pradesh, emphasizes the transformative potential of education. By building a movement of teacher leaders and equipping students with skills to become responsible citizens, they highlight how Section 8 Companies can drive education-focused initiatives.
In making your decision, remember that there is no one-size-fits-all answer. Carefully evaluate your organization's unique needs, mission, resources, and long-term goals. Think about getting specialist legal and financial guidance from non-profit structure professionals. Here is an overview to help you:
A crucial choice that necessitates thorough evaluation of your organization's objectives, resources, and long-term goals is the best legal structure. The choice will rely on the particulars of your purpose and vision because trusts, societies, and section 8 businesses all offer unique advantages. Evaluation of elements such as your company's size, fundraising potential, governance structure, and regulatory requirements is crucial.
There is no one answer that works in every circumstance, so seeking the advice of legal and financial experts is highly recommended. As Tata Trusts, Sparsha Trust, Desire Society, Pratham Education Foundation, Access Life Assistance Foundation, and Foster and Forge Foundation have demonstrated, the right legal framework can aid your organisation in making a lasting impression and experiencing long-term growth. So, choose the legal framework that best supports your noble cause as you embark on this journey. Do so with a clear grasp of the objectives and core principles of your organisation.
