Aspect | Private Limited Company | Section 8 Company |
Legal Structure | A Private Limited Company is a legal entity incorporated under the Companies Act, 2013. It has a separate legal identity from its shareholders and directors, meaning that the company can own assets, enter into contracts, sue or be sued in its own name. | A Section 8 Company, also known as a not-for-profit company, is formed for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, or any other useful object. It is incorporated under the Companies Act, 2013, and operates as a non-profit organization. |
Ownership | Shareholders of a Private Limited Company can be individuals, corporate entities, or other legal entities. Shareholders own the company through their ownership of shares, and their liability is limited to the amount unpaid on their shares. | Members and directors are the owners of a Section 8 Company. Members can be individuals or entities involved in promoting the objectives of the company. Unlike in a Private Limited Company, profits cannot be distributed as dividends to members; they must be utilized solely for promoting the objectives of the company. |
Minimum Directors | A Private Limited Company must have a minimum of two directors, and at least one director must be a resident of India. | A Section 8 Company must have a minimum of two directors, of which one must be a resident of India. |
Minimum Members/ Shareholders | A Private Limited Company must have a minimum of two shareholders, and there can be maximum 200 number of shareholders. | A Section 8 Company must have a minimum of two members. There can be maximum 200 number of members. |
Objective/Purpose | Private Limited Companies are primarily formed for carrying out profit-making activities such as trading, manufacturing, services, etc. They can engage in a wide range of commercial activities with the primary objective of generating profits for their shareholders. | Section 8 Companies are formed for promoting charitable, educational, scientific, research, social welfare, religious, or any other useful object, as specified in their Memorandum of Association. Their activities are directed towards promoting societal welfare rather than generating profits for distribution among members. |
Profit Distribution | In a Private Limited Company, profits can be distributed among shareholders in the form of dividends after payment of applicable taxes. | A Section 8 Company cannot distribute profits among its members in the form of dividends. All profits must be utilized for promoting the objectives of the company. This ensures that the funds are reinvested into the company's activities and contribute to achieving its social or charitable goals. |
Taxation | Private Limited Companies are subject to corporate tax on their profits at the applicable rates. Additionally, dividends distributed to shareholders are taxed in the hands of the recipients. | Section 8 Companies can enjoy tax exemption on their income if they are approved by the Income Tax Authorities under Section 12AA of the Income Tax Act, 1961. However, any income not applied towards the objectives of the company is subject to taxation. Donations made to Section 8 Companies are eligible for deduction under Section 80G of the Income Tax Act, incentivizing contributions towards charitable activities. |
Compliance | Private Limited Companies have relatively higher compliance requirements, including maintaining statutory books and registers, conducting annual general meetings, filing annual financial statements and annual returns with the Registrar of Companies (RoC), undergoing statutory audits, etc. | Section 8 Companies have lesser compliance requirements compared to Private Limited Companies. They are required to file periodic reports with the RoC and other regulatory bodies to maintain compliance with the Companies Act, 2013. |
Registration Cost | The registration cost for a Private Limited Company is relatively higher due to stamp duty, legal, and administrative expenses associated with incorporation. | The registration cost for a Section 8 Company is comparatively lower as they are exempt from stamp duty on incorporation. Additionally, reduced compliance requirements result in lower administrative costs over time. |
Fundraising Potential | Private Limited Companies have various avenues for fundraising, including equity financing from private investors, venture capitalists, and through public offerings of shares. They can also raise debt capital from financial institutions and banks. | Section 8 Companies have limited fundraising avenues compared to Private Limited Companies. They rely primarily on donations, grants, subscriptions, and government funding for carrying out their charitable activities. However, their tax-exempt status and social impact may attract donations from individuals, corporations, and government agencies supportive of their cause.
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Perceived Credibility | Private Limited Companies are often perceived as more credible and reliable for commercial activities due to the stringent regulatory oversight and transparency requirements imposed by the Companies Act, 2013. | Section 8 Companies are perceived as socially responsible and beneficial for community development initiatives. Their commitment to social welfare and charitable activities enhances their reputation among stakeholders, including donors, beneficiaries, and the public. However, they may face challenges in establishing credibility for commercial activities due to the focus on non-profit objectives. |
Administrative Flexibility | Private Limited Companies offer more flexibility in operations and management decisions, allowing shareholders and directors to pursue profit-maximizing strategies within the bounds of applicable laws and regulations. | Section 8 Companies may have restrictions on their operations and use of funds as per the objectives outlined in their Memorandum of Association (MoA). They must ensure that all activities are aligned with their stated charitable or non-profit objectives to maintain compliance with regulatory requirements. While this may limit operational flexibility, it reinforces the company's commitment to its social or charitable mission. |
Disclaimer: This article is intended for educational and informational purpose only. It should not be considered as any legal or professional advice. It is recommended to seek the assistance of a Practising Company Secretary or consultant in India to choose the most appropriate type of company for your business.
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