Non Profit Organizations

Non-Profit Organization INTRODUCTION: A non-profit organization (abbreviated "NPO", also "non-profit" or "not-for-profit") is a legally constituted organization whose primary objective is to support or to actively engage in activities of public or private interest without any commercial or monetary profit purposes. The range of activities of NPOs include the humanitarian aid, animal protection, education, the arts, social issues, charities, children’s education, health care, religion, research, sports as well as other endeavors. Non-profit organizations in India are free to address any public need as long as the need is addressed in a lawful manner that is without attempt to promote disharmony or general public order or without any intention of private game.

Distinction between Non-Profit organizations and other organizations: 1. Though the words not-for-profit has been widely debated in the industry, NPOs generally

do not operate to generate profit a characteristic widely considered to be defining of commercial organizations. Though their objective is not to make profit it does not stop them from trading at a profit. Therefore an NPO may accept, hold and disburse money and other things of value. 2. Non-Profit organizations may be operated by paid professionals or by volunteers. A commercial organization is operated only by professionals who are paid for their services. 3. An NPO may have members (?) or participants (?) or beneficiaries or students etc. as opposed to customers in a for-profit organization.

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TRUST: Trust: There exists no central law for public trust but private trust is governed by the Indian Trusts Act, 1882. Section 3 of Indian Trusts Act defines a trust as an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by him for the benefit of another. Principle of the law of charity states that a trust is not charitable unless it is directed to public benefit. ➢ A trust is generally irrevocable and once set up, cannot be wound up (which 1 of the ➢

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three?). Doctrine of cy pres (?) can be applied (i.e. changing the objects while keeping them as close to the original as possible). In case of negligence of the trustee the charity commissioner can take steps to revive, and in case it becomes difficult to carry out the objects of the trust. Two or more trusts with similar objects can also be legally amalgamated or merged. Under the Bombay Public Trusts Act, 1950, a public charitable trust may be registered with the office of the charity commissioner for purposes like relief of poverty, medical relief, education, etc and the facilities are provided in the interest of social welfare and public benefit, but does not include a purpose which relates exclusively to religious teaching or worship (according to Section 9(1)). A trustee may remain trustee for life unless there is a scheme for election in the trust deed.

Formation requirements: ➢ A public charitable trust is generally floated with some property (movable or

immovable) that legally vests in the trustees. ➢ A minimum of two trustees is required to start and run a trust. ➢ The founders of the trust can remain trustees for life and they need not be elected unless otherwise stipulated in the trust deed. ➢ The surviving trustees may appoint new trustees by resolutions passed at board meetings. Registration: ➢ Application to be submitted at office of charity commissioner having jurisdiction over

the region or sub region of the state in which the trust is seeking to be registered. ➢ Application should provide details regarding name of the trust, names and address of

the trustees, mode of succession, etc. ➢ The trust deed to be executed on non judicial stamp paper, the value of which will depend on the valuation of trust property 2

SOCIETIES: Societies are governed by the central Societies Registration Act of 1860, though different states have amended the act to suit their specific requirements. ➢ According to section 20 of the Societies Registration Act, the following societies can be

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registered under the Act: “charitable societies, military orphan funds or societies established at the several presidencies of India, societies established for the promotion of science, literature, or the fine arts, for instruction, the diffusion of useful knowledge, the diffusion of political education, the foundation or maintenance of libraries or reading rooms for general use among the members or open to the public, or public museums and galleries of paintings and other works of art, collections of natural history, mechanical and philosophical inventions, instruments or designs.” Societies are legal entities and can thus sue and be sued. The liability of their members is limited and their private assets cannot be confiscated to satisfy the society’s liabilities. The founders of the society can continue to remain members of the governing council or managing committee, subject to their being elected to the same from time to time. A society can be wound up by; • passing proper resolutions, • transferring all funds and properties of the society to another non-profit organization with similar objects and activities

Formation requirements: ➢ In a society a minimum of seven individuals is required for registration. ➢ Members of the general public may enroll as members of a society by paying the

membership fee and agreeing to abide by the rules and regulations of the society. ➢ The managing committee may have the right to refuse membership or terminate the membership of a member under specified circumstances. Registration: ➢ Application to be submitted to registrar of societies. ➢ Application to be submitted together with memorandum of association and rules and regulations. ➢ Need for additional documents such as consent letters, or members of managing committees, affidavit for different states. COMPANIES: 3

Indian Companies Act, 1956 is made to govern profit making entities, section25 allows for the possibility of obtaining non-profit status for certain companies. ➢ Company has a limited liability

➢ It is formed for promoting commerce, arts, science, religion, charity or any other useful objects. ➢ No profits or other incomes from promoting the objectives are distributed by way of dividends to its members. ➢ The company can be wound up by following certain procedures laid out in the law by convening a special general meeting, passing proper resolutions and transferring all funds and properties of the company to another non-profit organization with similar objects and activities. ➢ It has to obtain a prior permission of the charity commissioner to buy property, sell property and file regular change reports and budgets. Formation requirements: ➢ In the case of a Section 25 company, the income and property of the company must be applied solely for the promotion of the objects as set forth in its memorandum of association and no portion thereof can be paid or transferred directly or indirectly by way of dividend, bonuses or otherwise to the members of the company. ➢ The founders of a Section 25 company may continue to remain directors, subject to their being elected to the board of management from time to time. ➢ In case of public company a minimum of seven persons are required whereas for private company two members are required. ➢ As in the case of a society, the set-up is quite democratic and members enjoy voting and other rights. Registration: ➢ Application to the registrar of companies for availability of name with the choice of three other names. ➢ Main documents required are memorandum of association (MOA) and articles of association (AOA). ➢ The application should be accompanied by three printed copies of MOA and AOA of the proposed company, duly signed by all the promoters with their full name, occupation and address. ➢ Documents required for registration • Declaration by an advocate or charted accountant that the memorandum and articles of association has been drawn up in accordance with Indian Companies Act • Statement of assets and the liability of association as on the date of application or within seven days 4

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List of name, addresses and occupation of the promoters, members of the proposed board of directors together with the name of the company • Estimate of future annual income and expenditure of the proposed company along with the source of income and object of expenditure. • Brief description of the work proposed to be done after registration • Declaration by each of the person making application that he or she is of sound mind, not an undischarged insolvent, not convicted by a court for an offence and does not stand disqualified under section 203 of the Companies Act, 1956 for appointment as director ➢ The application should be published at least once, in a newspaper in a prescribed language of the district in which the registered office of the proposed company is to be situated within a week from the date of making the application to the regional director. License under section 25 ➢ An application for the license under 25 for the company is to be submitted to the

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Regional Director (Department of Company Affairs). The license essentially permits the word 'Limited' or 'Private Limited' to be deleted from name of the company. It could take up to 12 weeks after application to receive the license under section 25 of the Companies Act 1956. Pursuant to application to the Regional Director (within seven days thereafter), the applicant company has to publish a notice in a newspaper where the registered office is situate and certified copy of the notice to filed with the Regional director. 4. Registration with ROC Registration certificate is normally granted within one month after filing section 25 license; Converting existing company to section 25 company The Companies Act, 1956 also facilitates the conversion of an existing company to a non-profit company. Foreign Director There is no bar under Indian law for a foreigner to be a Director in a section 25 company, (relevant permissions prescribed under the Foreign Exchange Management Act.)

COOPERATIVES: It is defined as an institution that promotes the economic and social betterment of its members and an enterprise that is based on mutual aid conforming to co-operative principles. Institutions registered as co-operatives are expected to abide by laws which can vary considerably from state to state. Formation requirements: ➢ Ten persons from different families are required to form a cooperative under the Delhi Societies Cooperative Act, 1972. ➢ Agricultural cooperatives must reserve half of their membership for scheduled castes (i.e., certain castes in India that are socially and economically marginalized). 5

➢ In cooperatives in which the central government shares capital, up to one-third of the managing committee members can be nominated by the government. Registration: ➢ Application for registration to be made to registrar of cooperatives having jurisdiction

over the region or sub region of the state in which the corporative is seeking to be registered ➢ Application is to be submitted together with MOA and AOA

TRADE UNIONS: These are governed by trade union act of 1926. It defines a trade union as a temporary or permanent institution formed for regulating the relation between workers and employers, among workers or among employers. In contrast to all other forms of non-profit organizations, trade unions are allowed to: ➢ Use their general fund to remunerate their members and staff ➢ To fund legal procedures, educational activities and general welfare of its members. ➢ They are also allowed to have separate funds for promoting civil and political interests of their members. Registration: ➢ Application for registration to be made to the registrar of trade unions together with a copy of the rules of the trade union ➢ Any person who has attained the age of 15years can be its member ➢ Seven or more persons can apply for registration of trade unions. Comparison among Trust, Society and Nonprofit Company Trust

Society

Section-25 Comapny

Statute/Legislation

Relevant State Trust Societies Registration Act or Bombay Public Act, 1860 Trusts Act, 1950

Indian Companies Act, 1956

Jurisdiction

Deputy Registrar/Charity commissioner

Registrar of societies (charity commissioner in Maharashtra).

Registrar of companies

Registration

As trust

As Society As a company u/s In Maharashtra, both as 25 of the Indian a society and as a trust Companies Act. 6

Registration Document

Trust deed

Memorandum of association and rules and regulations

Memorandum and articles of association. and regulations

Stamp Duty

Trust deed to be executed on nonjudicial stamp paper, vary from state to state

No stamp paper required for memorandum of association and rules and regulations.

No stamp paper required for memorandum and articles of association.

Members Required

Minimum – two trustees. No upper limit.

Minimum – seven managing committee members. No upper limit.

Minimum three trustees. No upper limit.

Board of Management

Trustees / Board of Trustees

Governing body or council/managing or executive committee

Board of directors/ Managing committee

Mode of Succession on Board of Management

Appointment or Election

Appointment or Election by Election by members of members of the the general body general body

Other features of nonprofit organization ➢ Non-profit organizations need to register for tax exemptions with the Income Tax

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Authorities to qualify for exemptions under section 11 of the Income Tax Act within one year from the creation of the non-profit organization. A donor is entitled to 50% deduction from taxable income for donations made to nonprofit organizations having a 80G(5) Contribution made to a project or scheme notified as an eligible project or scheme for the purpose of section 35AC of the Income Tax Act would be eligible for 100% deduction Every non-profit organization that is required to file the return of income under section139 (4A) of the Income Tax Act has to apply for a Permanent Account Number (PAN). All non-profit organizations requires prior permission of central government to receive foreign contribution

EXAMPLE THE COMPANIES ACT, 1956 COMPANY NOT FOR PROFIT 7

(Section 25 Company) COMPANY LIMITED BY SHARES MEMORANDUM OF ASSOCIATION OF NATIONAL INSTITUTE FOR SMART GOVERNMENT __________ ➢ The name of the Company is “NATIONAL INSTITUTE FOR SMART GOVERNMENT”

➢ The Registered Office of the Company will be situated in the State of Andhra Pradesh. Features of this Nonprofit Company are: ➢ The main objects of the company to be pursued by the company on its incorporation are to:

Raise societal awareness of, and capability in, smart governance and the economic opportunities it offers to the citizens, firms and the government through appropriate awareness, education and capacity building programs. ➢ Strive to position itself as an institution dedicated to promote electronic governance by combining the best that the specialized institutions in the country have to offer into a holistic program. ➢ Strive to position itself as the principal mechanism to channelize private competencies -

including financial, technical and managerial – into national electronic governance efforts and to appropriately complement governmental competencies and efforts in this regard. ➢ Ensure that a countrywide strategic architecture and groundwork is in place so that they can play a robust and effective part in developing a national environment for electronic governance. ➢ Ensure that policies and practices on smart governance reinforce a ‘hassle-free environment for the citizens and firms as well as enhance the competitiveness of Indian economy. To that effect ensure: • Transformation of the business of government to take the ‘hassle’ out of dealing with the government, dramatically improve service delivery, reduce costs, and renew administrative processes; • The transformation of governance itself by changing the role of the citizen and firms as a stakeholder in government. ➢ Subject to the provisions of the Companies Act, 1956 to lend and advance money or give credit either in connection with the main object of the Company with or without security, to such persons, firms concerns and / or Companies and on such terms as may deemed expedient. Subject to provisions of Section 292, 293 and 58-A of the Companies Act and the rules made there under to borrow or raise or secure the payment of money or to receive money or deposit at interest or otherwise, and at such time or times as the Company may deem fit by promissory ➢

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notes or by taking credits in or opening current, loans or overdraft accounts with any bank, company, firm or person and whether with or without any security or by such other means. ➢ Help, establish linkages with financial institutions, urban and rural communities and government agencies (Central, State or Local) for promotion of each and every object of the Company. Raise funds and accept donations (in cash or kind) subscriptions, grants of money, securities, and property of any kind and / or to undertake and accept the management of transfer ship of any endowment, trust fund or donation not inconsistent with the objects of the Company. ➢

➢ Accept donations, assistance and funds on behalf of the implementing agencies from the Government and / or foreign donors subject to such laws as may be applicable in the manner stated above and to obtain necessary accounts and information regarding the physical and financial progress from the implementing Agency / Agencies. ➢ Open and operate a banking account or banking accounts and to draw, make, accept, endorse, discount, execute and issue promissory notes, bills of exchange, bills of lading, warrants, drafts, cheques, bonds, debentures and other negotiable or transferable instruments. ➢ Print and publish and periodicals, books, journals, booklets and / or leaflets in furtherance of its objects. ➢ Invest the monies of the Company not immediately required in such manner as the Company thinks it. ➢ Provided that the Company shall not support with its funds, or endeavor to impose on, or procure to be observed by its members or others, any regulations or restriction which, as objects of the Company would make it a Trade Union. ➢

The liability of the members is limited.

The share capital of the company will consist of Rs. 25, 00, 00,000 (Twenty five Crores only) divided into 25, 00,000 (Twenty Five Lakhs) shares of Rs. 100 (Rupees Hundred) each. ➢

If upon a winding up or dissolution of the Company, there remains, after the satisfaction of all the debts and liabilities, any property, whatsoever, the same shall not be distributed amongst the members of the Company but shall be given or transferred to such other company having objects similar to the objects of the Company to be determined by the members of the Companyat or before the time of dissolution or in default thereof, by the High Court of Judicature that has or may acquire jurisdiction in the matter. ➢

Example of a Non-Profit Organization: 9

The Institute of Chartered Financial Analysts of India (ICFAI), Road No.3, Banjara Hills, Hyderabad -500034 was established in Hyderabad in October, 1984 as a non-profit educational society. Follows Section 20 of Societies Registration Act by stating its objective: The purpose of training qualified individuals by offering programs in management, finance, banking, insurance, accounting, law, arts, commerce, etc . Previously known as “Institute of Certified Financial Analysts of India” it changed its name to Institute of Chartered Financial Analyst of India after agreeing license in 1985.ICFAI has 70 teaching centers across the country with 12000 students on rolls and 70000 pursuing various programs in distinct education mode. ICFAI, a non-profit society under the A.P. (Telangana Area) Public Societies Act 1350F (Act1) is the sponsor of ICFAI University. The ICFAI University represents the multi state network of universities in different states under respective legislations, e.g. ➢ The ICFAI University, Raipur has been established under the Chhattisgarh Niji Ksetra Viswavidyalaya Adhiniyam, 2002 ➢ The ICFAI University, Dehradun was established under the ICFAI University Act, 2003. Funding: ICFAI University with an initial investment of Rs. 2400 has built a reserve of 7 Crores in 10 years time which is being invested back into growth and expansion. So it clearly abides by the law of a non-profit society, i.e. those who have invested money into the ICFAI venture cannot gain any profit from their investment by way of dividend. The venture being a nonprofit society is not owned by those who invested money; hence they can’t sell their shares to realize any capital gains either. Supreme court declared a large number of private universities as null and void established under the Chhattisgarh Act, but ICFAI University does not come under this controversy because it is notified as a university under Chhattisgarh Private University Act, 2003(Uttaranchal), ICFAI University Act 2004(Tripura) and ICFAI University Act 2004 (Sikkim). ICFAI University Dehradun is notified through the State Gazette vide Notification No.273

Amendments made in non-profit organization laws:

➢ Companies (Amendment Bill), 2000-2001 A new fund to be formed for the rehabilitation of sick companies and a levy is proposed to be made from all companies for contribution to the fund. The levy is a percentage of the turnover of the company. This is irrespective of whether the company is a profit making company or not. It states that even sick companies are liable to contribute to the fund. 10

➢ Companies (2nd Amendment Bill 2001)

This bill enables cooperatives to convert themselves as companies under the companies Act only if 2/3rd of the members agree. ➢ Finance Act 2007 has amended provisions of Section 13(1) (d)(3i) with retrospective

effect to April 1,1999 allowing nonprofit companies to invest in shares of public sector companies as well as to acquire equity shares of a ‘depository’ ➢ Under amendments to Section 11(4A) of the Income Tax Act 1961, a not-for-profit

organization is not taxed on income from a business that it operates that is incidental to the attainment of the objects of the not-for-profit organization, provided the entity maintains separate books and accounts with respect to the business. ➢ Under the Foreign Contribution (Regulation) Act, 1976 (FC(R)A), all not-for-profit

companies in India (e.g., public charitable trusts, societies and section 25 companies) wishing to accept foreign contributions must register with the Central Government; agree to accept contributions through designated banks; and maintain separate books of accounts with regard to all receipts and disbursements of funds. Furthermore, not-for-profit entities must report to the Central Government all foreign contributions received within 30 days of the receipt of the contribution, and must file annual reports with the Home Ministry.

REFERENCES:

CAF India ICMR Text Book Guide to Companies Act by A Ramaiya Mercantile Law by N D Kapoor ➢ Research Paper on Philanthropy and Law in India by Sanjay Aggarwal ➢ www.hindulbusinessline.com ➢ http://www.legco.gov.hk/yr99-00/english/bc/bc06/general/79_brf.pdf (amendment) ➢ ➢ ➢ ➢ ➢

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