Basic Difference Between Private Ltd and Section 8 Companies
When deciding on the type of corporate structure for a new venture, it’s essential to understand the distinctions between various business entities. Two common structures in India are Private Limited companies and Section 8 companies. While both offer legal benefits and protection, they serve different purposes and operate under different regulations. This guide will explore the basic differences between Private Limited and Section 8 companies, helping you make an informed decision about which structure best suits your needs.
Objectives and Purpose
Private Limited Companies: Private Limited Company (Pvt Ltd) is a popular business structure in India, designed for profit-oriented enterprises. The primary objective of a Private Limited Company is to carry out commercial activities with the aim of generating profits for its shareholders. These companies are often chosen by startups and growing businesses due to their ability to attract investment, limit liability, and provide a structured framework for operations.
Section 8 Companies
In contrast, a Section 8 Company is established with the objective of promoting non-profit activities, such as commerce, art, science, education, research, social welfare, religion, charity, environmental protection, or similar purposes. The primary goal of a Section 8 Company is not to earn profits but to further its non-profit objectives. Any profits earned by a Section 8 Company must be reinvested in the organisation to advance its social, cultural, or environmental goals, rather than being distributed to its members.
Private Limited Companies: The registration process for a Private Limited Company involves several steps and requires compliance with the Companies Act, 2013. Here’s an overview of the process:
1. Digital Signature Certificate (DSC): Obtain DSCs for the proposed directors. DSCs are necessary for signing electronic documents during the registration process.
2. Director Identification Number (DIN): Apply for DIN for the proposed directors if they do not already have one.
3. Name Approval: Submit an application to the Ministry of Corporate Affairs (MCA) for the approval of the company’s name through the RUN (Reserve Unique Name) service.
4. Filing Incorporation Documents: Prepare and file the incorporation documents, including the Memorandum of Association.(MOA) and Articles of Association (AOA), along with other required forms such as SPICe+ (INC-32).
5. Certificate of Incorporation: Once the documents are verified, the Registrar of Companies (ROC) issues a Certificate of Incorporation, officially recognizing the establishment of the Private Limited Company.
The registration process for a Section 8 Company is more stringent, given its non-profit nature and the need to ensure compliance with its objectives.
1. Obtain DSC and DIN: Similar to Private Limited Companies, obtain DSCs for the proposed directors and apply for DIN if required.
2. Name Approval: The name should reflect the non-profit nature of the company.
3. Draft MOA and AO: Prepare the MOA and AOA, clearly stating the non-profit objectives and rules governing the company’s operations.
4. File Application for Licence: Submit the incorporation forms, including SPICe+ (INC-32), MOA (INC-13), AOA, and other required documents, to the MCA. Additionally, apply for a licence under Section 8 of the Companies Act, 2013.
5. Verification and Inspection: The documents and the objectives of the company are thoroughly verified by the ROC. There may be an inspection to ensure compliance with the non-profit criteria.
6. Issuance of License and Incorporation Certificate: Upon successful verification, the ROC issues a licence under Section 8 and a Certificate of Incorporation, officially recognizing the company as a non-profit entity.
1. Limited Liability: Shareholders' liability is limited to the amount they invested in the company, protecting personal assets from business liabilities.
2. Ease of Raising Capital: Private Limited Companies can raise capital through equity funding, attracting investors by offering shares.
3. Structured Management: A clear organisational structure with a defined board of directors and shareholders, ensuring efficient management and decision-making.
4. Credibility and Trust: Being registered with the MCA enhances the credibility and trustworthiness of the company, making it easier to establish business relationships and secure financing.
Restrictions on the transfer of shares, limiting liquidity.
Increased expenses and regulations related to compliance.
1. Tax Exemptions: Eligible for various tax exemptions and benefits under the Income Tax Act, reducing financial burdens.
2. Public Trust and Support: Enhanced credibility due to their non-profit nature, making it easier to attract donations, grants, and public support.
3. Focus on Social Impact: Dedicated to promoting social, cultural, and environmental causes, contributing to societal welfare.
4. No Minimum Capital Requirement: No mandatory minimum capital required for registration, making it accessible for organisations with limited initial resources.
(a) Stringent regulatory oversight to ensure adherence to non-profit objectives.
(b) Profits cannot be distributed to members; must be reinvested in the organisation.
Choosing between a Private Limited Company and a Section 8 Company depends on the primary objectives and long-term goals of your organisation. If your focus is on profit-making and business growth, a Private Limited Company offers numerous advantages in terms of structure, capital raising, and limited liability. However, if your aim is to promote social welfare, charitable activities, or environmental protection, registering as a Section 8 Company provides legal recognition, tax benefits, and public trust essential for non-profit operations. Understanding these differences will help you make an informed decision that aligns with your organisational goals and regulatory requirements.