Overview
Creating a charitable or non-profit organization entails navigating through various legal structures, each with its own purpose. Trusts, Section-8 Companies are two common frameworks that individuals and groups consider when wishing to contribute to social causes. In this blog, we will provide a detailed overview of each structure, including key characteristics, formation processes, and governing regulations. Understanding these fundamental aspects will enable individuals to make informed decisions when choosing the best option for their philanthropic endeavours.
Trust
There is a trust established for the benefit of the public. A trust can have a variety of purposes, including education, animal welfare, religion, or even recreation, but it can only be established if property is involved, such as the construction of schools or hospitals.
A first party establishes the Trust as a legal entity. In this case, the first party authorises the second party to transfer assets for the benefit of the third party. The first party here refers to the Trust author or Trustor, while the second party is the Trustee. The Trustor transfers the properties to the Trustee on behalf of the beneficiary (a third party). The trust’s subject matter is referred to as Trust Property, and the document that defines the terms and conditions is known as the Trust Deed. Trusts are governed by the Indian Trusts Act of 1882. They apply throughout the country, except in the state of Jammu and Kashmir.
A Trust can be easily formed and controlled. Nonetheless, there is no regulatory oversight, so disputes must be resolved in court. Furthermore, the trust deed can only be altered by the settlers. In the absence of settlers, one must go to court or amend the trust deed. There are no regulatory requirements for governance or public account filing.
Section 8 Company
A company registered under Section 8 has limited liability. It is usually formed to promote commerce, recreation, art, or religion. The main requirement for Section 8 organisations is that their profits cannot be divided. They can only use the profits to promote and strengthen their work. It can only be created with two people, either Indian or international. It should have at least two directors who are not required to be members.
Section 8 companies are classified into two types: section 8 companies with shares and section 8 companies with guarantees.
A section 8 company with shares operates like a regular company in terms of ownership.
A Section 8 company with guarantee has a different structure and financial obligations:
It does not have shareholders. Instead, it has members who promise to pay a certain amount if the company runs into financial difficulties or fails. Members make no upfront contributions; their role is to offer a guarantee.
Difference Between Trusts, Societies, and Section 8 Companies: Comparative Analysis
While Trusts, and Section 8 Companies share the common goal of promoting social welfare, they diverge significantly in their legal frameworks, operational mechanisms, and regulatory compliance.
| Sr.No | Feature | Trust | Section 8 Company |
| 1 | Formation | Created through a trust deed | Registered under the Companies Act, 2013 |
| 2 | Legal Entity | Separate Legal Entity | Separate Legal Entity |
| 3 | Members/ Trustees | Trustees | Directors and Shareholders in case of Section with Share and only director in case of Section 8 with qurantee |
| 4 | Governance | Board of Trustees | Board of Directors |
| 5 | Regulation | Governed by Indian Trusts Act | Governed by Companies Act, 2013 |
| 6 | Registration Authority | Registrar of Trusts | Registrar of Companies |
| 7 | Minimum Members/ Trustees | At least two trustees | Two directors |
| 8 | Auditing Requirements | Mandatory annual audit | Mandatory annual audit |
| 9 | Tax Benefits | Tax exemptions under IT Act | Tax exemptions under IT Act |
| 10 | Dissolution | Except a Public Charitable Trust, all trusts can be dissolved on grounds mentioned in the Trusts Act | Companies can be wound up following the conditions and procedure prescribed under the Companies Act |
| 11 | Transparency in working | Low | Working is highly transparent as everything is in the public domain |
| 12 | Relevant Documents | To register a trust, one must first have a trust deed. | A Section 8 company requires both a Memorandum of Association and Articles of Association. |
| 13 | Time period | It can take up to 3 to 4 months days to register a trust, | It takes 20 to 25 days to register a Section-8 company. |
Conclusion
Setting up and registering a non-profit organisation is simple if all procedures are followed correctly. Now that you have a better understanding of the key differences between the three types of non-profit organisations, you can make an informed decision about which type of non-profit entity to establish based on your company’s objectives. Once a specific type of non-profit objective is determined, it must be registered with the same objective. To obtain specialised services such as Trust Registration, Society Registration, or Section 8 Company Registration, simply request a call back from our expert start-up advisors.