Which one is better choice- Trust, Society or Section 25 Company ?

There are three ways to establish a non-profit Organisation or charitable institution in India. Either it can be registered as Trust, or Society or a Section 25 Company. It is very often argued that which one is the best mode to operate on Indian soil. There is no distinction in the eyes of Income Tax Department in terms of Exemption of Income or Grant of 80G Certificates. We have made a detailed study on the basis of Advantages, Limitations, Benefits and Ease of process.

Modes of Formation and Registration of a Non -Profit organisations in India:

1) Trust

2) Society

3) Section-25 Company

TRUST:-

A public charitable trust is usually floated when there is a property involved, especially in terms of immovable property like land and building. If a person wishes to set apart either property or money for a charitable purpose so that the revenue may be devoted for the accomplishment of the charitable activity, and wants to limit control over the disposal of that income to persons whom he knows or approved, then it is best to set up a public charitable trust. But it should be kept in mind that a private trust whose beneficiaries generally are relatives or friends and not society at large, does not enjoy tax benefits.

Different states have their separate laws for formation of Trust. In absence of specific state laws, Indian Trusts Act, 1882 is applicable. For example: A public charitable trust can be set up under the Bombay Public Charitable Trusts Act 1950 in Maharashtra or Gujarat. Elsewhere in the country it can be set up under Indian Trusts Act by registration of the trust deed with the registrar.

Requirements for Trust:

A minimum of only two persons are required to form a trust, but there is no upper limit. Trust can be set up by executing a trust deed on non-judicial stamp paper worth 4 per cent of the value of the trust property, with either the charities commissioner (Maharashtra or Gujarat) or with the registrar of documents (elsewhere in India).

Benefits of Trust:

The trust deed is the heart and soul of any Charitable Trust and it enshrines the aims and objects and mode of management of the trust. The management rests with the board of trustees who can remain so for life, and need not stand for election. Changes in the composition of the board are usually by invitation and not election.

This ensures that the trust is managed by those permitted by the original contributors who cannot be removed by election. Therefore danger of takeover by persons not approved by the trustees or settler is less.

Limitations of Trust:

The main disadvantage is that the alteration of the objects laid down in the trust deed is difficult and only the settler can modify them. The charities commissioner also has more power to intervene in the affairs of a trust than in a society, and a trust cannot be dissolved easily.

Recommendations:

A public charitable trust should be formed only when one wishes to make an endowment of property for perpetuity and the trustees’ desire that this property be used only for specified charitable purposes with close control by the original settlers/trustees.

Society:

Alternatively, one can set up a registered society under the Societies Registration Act of 1860 or various state laws equivalent to Federal Societies Registration Act. Societies are generally 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, collection of natural history, mechanical and philosophical inventions, instruments or designs, etc.

Requirements:

A minimum of seven members are required to form a society. They have to file a memorandum of association on non-judicial stamp paper, setting out the objectives of the society before the registrar of societies in the state in which the society is set up. The legal requirements are much simpler than in the case of a trust or Section 25 companies.

Benefits of Society:

Unlike trusts, a society has a more democratic set up with membership and an elected body to manage the society. The original members of a society can continue to remain in control as long as they are elected to the managing committee, but at the same time can opt out of the society if they wish, which trustees cannot. The society can exist as long as the members wish, but there is always a possibility of complete renewal of members and objects can be modified easily. It is easier to wind up a society than it is to wind up a trust.

Limitations of Society:

The major disadvantage is that due to democratic procedures, the society can be taken over by elements opposed to the founding members. Therefore possibility of hijack of original idea is very much possible.

Section 25 Company:

According to section 25(1)(a) and (b) of the Indian Companies Act, 1956, a section-25 company can be established ‘for promoting commerce, art, science, religion, charity or any other useful object’, provided the profits, if any, or other income is applied for promoting only the objects of the company and no dividend is paid to its members.

For an individual or group of individuals who wish to create a non-profit concern for charitable purposes as an adjunct to main business activities it would be best to create a Section 25 company under the Indian Companies Act of 1956. Only seven members are required to set up a non-profit company. The main instrument is the memorandum and articles of association filed on non-stamp paper before the registrar of companies.

Benefits of Sec. 25:

Its advantages are that a wide range of activities can be taken up. Though complex, its objects can be modified if need arises, and providing services and trading on a no-profit basis is possible. The management is with the board of directors and prevention of takeovers is easier than in a society.

Limitations of Section 25:

However, under company law, the formation and regulation procedures are more complex than in either a trust or society. There are various compliances which need to be fulfilled periodically. Cost of formation and Taxes would be higher in Section 25 Company.

Tabular Comparison of Trust, Society and Section 25 Company:

In sum the type of legal incorporation to be chosen would depend mainly upon requirements and preferences. All three types of organisations can hope to get tax benefits provided they meet the necessary criteria, though.