A company form of business gives a formal structure to the business organisation and makes it a secure option for undertaking business operations. People usually incorporate a company because of its several benefits, namely, legal status, a separate entity, limited liability, etc., helping them to minimise risks and maximise profits. When a company is incorporated, it is treated as a separate entity and distinct from the members forming it. It also has a separate legal and official status before the law. It is these features of a company that provide a sense of protection and assurance to owners against any risk or unlawful proceedings.
A company’s form of business is governed by the Companies Act, 2013 and is defined in Section 2(20) of the Act as ‘a company incorporated under this Act or any previous company law’.
Company is not a natural person, like a human being but, it is taken as a person in relation to law. It is an artificial person created by law having its own legal identity and a separate status wherein the company and its owners are not treated as the same entity but two distinct personalities. Therefore, the company is liable for its actions and practices and the members are acting only on behalf of the company.
Private Limited Company
A Private Limited Company, according to the Companies Act of 2013, is a completely owned entity privately specified for small enterprises. This type of company works under the provisions of the Companies Act of 2013 but has limited liabilities to its shareholders. Such a company is more in preference to startups and small and medium-sized enterprises because of the inherent flexibility and advantages that the private limited company holds.
Features of a private company include:
- Distinct legal personality – A Private Limited Company is a separate individual, except for its shareholders and directors. It shall have the right to be the owner of its assets and liabilities and carry on operations under its own name and identity.
- Limited liability – As a result, the shareholders liability is strictly limited to their contributions into the company. Their other assets cannot be attached as a way of settling the debts of the company.
- Restrictions on transfer of shares – Shares in a private company are not transferable freely. In general, there is a requirement for acceptance by other shareholders or the approval of the company itself for the transfer of shares.
- Minimum number of directors – A minimum of two directors and a maximum of fifteen directors must be present at all times. Among those, at least one must be an Indian resident.
- Minimum and maximum membership – A private limited company shall have a minimum of two members and a maximum of two hundred members other than the current and former employees.
- Restrictions on public share issues – A private limited company is prohibited from issuing shares or debentures to the public at large. They can also not accept deposits from the public.
- Company name – Every private company must have the words “Private Limited” (e.g., XYZ Private Limited) at the end of its name at all times.
- Continuity of Existence – The company continues to exist as it is, irrespective of any change in its membership or management due to death, insolvency or resignation.
- Capital – The Companies Act 2013 determines the authorised capital of private companies to be at least Rupees One Lakh. There is no minimum paid-up capital. The capital structure of the company needs to be clearly mentioned in the Memorandum of Association (MOA).
Section 8 Company
As so defined by the Companies Act, 2013 is any company that has been made by Section 8, thus formed in India for such a purpose to encourage welfare, which is social, education, commerce, sports, science, religion, art, research relating to environment or conservation thereof and any other object with permissible purpose. A Section 8 company does not operate just like a regular profit-making business, but it makes profits toward furthering its objectives.
The main features of a Section 8 company are:
- Charitable Purpose: The main object should be to promote social welfare, charitable functions and not-for-profit organisation. All profits should be ploughed back in the company’s functions and cannot be declared as dividends.
- Capital Requirement: There is no minimum paid-up capital prescribed. A company can run, having such funds as are necessary for achieving its objects.
- Limited Liability: The liability of the members has always been limited to their respective holdings of shares like any other corporate structure.
- Restriction on Issue of Dividends: The income generated from the firm cannot be shared among its members or shareholders; it has to be applied to promoting the mission of the organization.
- Exemptions and Benefits: According to the Income Tax Act, 1961, some sort of exemptions and benefits lie down for Section 8 Companies. Besides, several procedural directives in the Companies Act 2013 do not burden on section-8 companies.
- Designatory Requirements: As a “non-profit” Section 8 company, the designation “Limited” or “Private Limited” is not to be included in its name.
- Separate Legal Entity: A Section 8 Corporation shall be treated as a separate legal identity and shall operate independently of its members. Consequently, it may enter into contracts, sue, and hold property in its name.
- License: Companies incorporated under Section 8 of the Act need to obtain a license from the Ministry of Corporate Affairs, Central Government to operate as a not for profit organisation.
- Membership: The membership structure of a Section 8 company depends on how it is incorporated, that is, whether as a public company or a private company. Same is the situation observed in case of minimum number of directors.
- Transferability of Ownership: The ownership or membership of a Section 8 company cannot be transferred freely.
- Perpetual Succession: It continues to exist perpetually even after the death, bankruptcy or resignation of any of its members.
Private Company Vs Section 8 Company
These organisations can be termed not-for-profit organisations that take care of welfare and philanthropy, and private companies focus primarily on work that brings about profit. The primary difference between these two categories of organisations is their objective, compliance with regulations or any other policy adopted regarding profit management. In Indian law, a clear-cut distinction is laid down between a private company and a Section 8 company. All fall under a distinct category of functions and regulations as encompassed by the Companies Act of 2013. Some specific differences are:-
1. Definitions
A Section 8 company is a not-for-profit company registered under the Companies Act 2013, whose activities are devoted to charitable purposes or whose activities are for the promotion of social welfare, religion, arts, commerce, education, research, science, sports and environment. Instead of distributing dividends to the shareholders, these companies reinvest their earnings for carrying on their objective.
Section 2(68) of the Companies Act, 2013 defines a private company to be a company which has a minimum paid-up share capital as may be prescribed and which by its articles of association restricts the right to transfer shares, except for One Person Company, it caps its members at two hundred and prohibits any public offer to subscribe to the securities of the company.
2. Purpose
A Section 8 Company will be incorporated for the purpose of carrying out activities of social welfare, scientific research, education, or arts while a Private Company will be formed for commercial activities with profit motive.
3. Profit Motives
In a Section 8 Company, all profits arising from being in operation shall be applied for investment by the company in any of its programs furthering those charitable concerns. Profits are not paid to or shared with its members.
In contrast, a Private Company distributes its profit to the shareholders, usually in the form of dividends.
4. Name Requirements
Private company names must add the words “Private Limited.” after its name.
Section 8 companies are not required to have “Private Limited” or “Limited” in their names and shall be subject to appropriate approvals.
5. Membership and Directors
Private companies must have at least two members and two directors with a maximum of two hundred members.
The number of members in a Section 8 company depends on whether the said company is incorporated as a private or a public company. If it is a private company then as specified before, the membership and directorship would be the same as a private company but if it is a public company then the minimum number of members would be seven and minimum number of directors would be three.
6. Tax Exemption
Private companies do not have any specific tax exemption.
Tax benefits under Sections 80G and 12A of the Income Tax Act are available to Section 8 Companies.
7. Conversion and Licensing
A private company may convert to a public company or a Section 8 company.
But a Section 8 company needs a license to operate as a non profit organisation from the Central Government and is also required to seek the approval of the Central Government for conversion into a private or public company.
Conclusion
Both Private Limited Companies and Section 8 Companies come under the umbrella of the Companies Act of 2013. However, each has its specific role. A Private Limited Company mainly acts as a profit-making entity; it focuses on making money that it will distribute among the shareholders. On the contrary, a Section 8 Company is a not-for-profit company that distributes all extra income generated to its mission of charitable or social objectives. The two types of companies show differences in objectives, profit distribution, tax benefits, and regulatory compliance, and they are thus suited to different purposes.
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