How to set up a Non-Profit Organization?

How to set up a Non-Profit Organization?

There is no particular pattern that can characterize the non-profit sector in India. These are also known as non-government organizations or NGOs. A non-profit organization hereinafter NPO does not earn any profits for its owners. Rather the organization donates its fund the organization’s objectives and goals. A non-profit organization may also use received donations to stay up and running. However, non-profit organizations in India are prohibited from engaging in a wide range of political activities, including political campaigning and direct political advocacy.

Types of non-profit organizations: –

Non-profit organizations are legally structured into three types. These are given below: –

  • A Trust incorporated under the Indian Trusts Act
  • A Society registered under the Societies Registration Act
  • A Company under Section 8 of the Companies Act

Trust: –

This is one of the most common types of non-profit organization. Basically, in trust, the property is transferred from one person to another, where the transferee manages the property for the benefit of an identified person or a class of persons. The transferor is known as the settler, the person to whom legal ownership is transferred is called the trustee, and the person who benefits by the trustee while using the property is called the beneficiary.

Generally, a trust can be of three types i.e. private, public, and religious trust.

Private trust: – Private trusts can be of many types depending on their purpose. These are created for the gain of one or more than one person.

Public trust: – Public trusts are those that are established for the benefit of either the public at large or some specific segment of society. This type of trust is often known as a charitable trust. Public trust can be set up to carry out welfare programs like promoting the advancement of education or human rights, protection of child rights, and other social welfare services.

Religious Trust: – These trusts are formed by religious institutions like Temples, Churches, etc., and the funds are used for the benefit of society. Such types of trust are mainly involved in the activities of promotion of religion.

Societies: –

Societies are similar to the trusts with a few minor differences. For incorporation of a trust, minimum two persons are required, whereas minimum seven persons are needed to form a society. State jurisdiction plays a phenomenal role in the registration of the societies as each state has its different set of rules for incorporation  As per Section 20 of the Societies Registration Act, a society can be registered for the following purposes: –

  • Charitable purposes
  • For the promotion of science, fine arts, and literature
  • Restoration of historical monuments
  • Education, public art museums, and galleries
  • Libraries

Section 8 Company: –

At least 3 members are required to form a Section 8 company while there is no upper limit on it. Such a company is incorporated with limited liability for the promotion of commerce, art, science, religion, charity, or any other useful object. If any income is derived through promoting the company’s objects then the same may be distributed in any form to its members. However, Section 8 Company may obtain non-profit status if its Memorandum of Association expressly makes it non-profit, or the income of the company is solely used for the promotion of charitable purposes, or members do not get any profit.

How to register an NPO in India?

The step-wise process involved in the registration of NPO in form of Trust, Society, and Section 8 Company are summarized below: –

Trust: –

  • Primarily, the person who intends for trust registration needs to choose an appropriate name for the trust.
  • The next step is to formulate a trust deed stating its purpose, mode of administration minimum and the maximum number of trustees, the procedure for selection and removal of the trustees, and so on. A trust deed must be executed on non-judicial stamp paper.
  • Submission of trust deed along with relevant document including PAN Card and Identification proof of the applicants, passport size photographs of all applicants, and address proof of the office, etc. with the Registrar
  • On successful completion of the process, a trust registration number is granted.

Society: –

  • In this process also after the selection of a name, a further step is to draft a Memorandum of Association, and Rules & Regulations, wherein the aims & objectives, and mode of management of the society must be mentioned. However, no stamp paper is required for the execution of MOA and Rules & Regulations.
  • After that the Memorandum of Association, Rules & Regulations along with supporting documents as mentioned above in Trust Registration must be submitted to the office of Registrar of Societies.
  • Upon being satisfied with the submitted documents, the Registrar of Societies issues the incorporation certificate of the society.

*It may be noted that the slightest difference in the registration process of the society and trust may occur according to the rules and regulations of different states in India.

Section 8 Company: –

  • The first and foremost step is to obtain Digital Signature Certificate (DSC) and Director Identification Pin (DIN) for all the proposed directors.
  • After obtaining the DSC and Din, the next step is to check the availability of the company name. For this, one needs to apply for the name of the company. Applicants can apply six names of the company, and one name will be allotted by the Registrar of Companies (ROC) on the basis of availability.
  • Upon approval of the company name, the next thing is to apply for the license. Certain documents are required for this process including Memorandum of Association, Article of Association, Declaration from practicing CA, Declaration by each applicant, and estimated statement of income and expenditure for next three years.
  • After issuance of the license, the next movement is to file for incorporation along with supporting documents like passport size photographs, affidavits and KYC of directors, PAN Card and address proof of directions, copy of passport in case foreign national applicant, consent letter of all directors, address proof of office address, etc.
  • And finally, on the satisfaction of the ROC, a Certification of Incorporation is issued along with Company Identification Number (CIN).

A registered NPO acquires a legal status and therefore, enjoys various privileges granted under the law. Tax exemption is one of the major benefits of the registered NPO since registration of the NPO is mandatory to avail tax exemption facility. Besides this, people who make contributions to the funds of NPO also become eligible for tax exemption.

-Kiranpreet Kaur

Associate at Aggarwals & Associates, S.A.S. Nagar, Mohali