Suitability of Form of Business for Providing Healthcare Facilities to General Public, Section 8 Company or Private Limited Company?
I. A Brief on Private Limited Company
A Private limited company is the most popular choice among entrepreneurs and start- ups, as it offers more stability and possibility to expand and grow. With a minimum of two individuals as shareholders and directors you could register a Private Limited Company, there is no requirement of minimum capital. The Companies Act 2013 has allowed many relaxations to private companies regarding compliance requirements. Further the Ministry of Corporate Affairs has introduced overhauling changes in the registration process which now takes only a matter of days to be completed. Further, the Company will now be allotted PAN , TAN, ESI and EPF registration upon incorporation
Advantages of Private Limited Company
If you want to start a business in India, a Private Limited company should be on top of your list due to its following advantages;
- No minimum requirement for share capital
- Easy registration process
- Easy to manage and less compliances compared to other form of companies
- Great Flexibility
- Limited Liability for members
- Closely held, hence it mitigates the risk of intrusion of an unknown.
Disadvantages of Private Limited Company
- Restriction in Transfer of shares
- Shares cannot be listed in stock Exchanges
- Limits maximum number of members to 200
- It cannot raise funds from public
II. A Brief on Section 8 Company
A Section 8 company which is a limited company will be focusing mainly on promoting commerce, art, science, sports, education, research, social welfare, charity, protection of environment or any other objective which is beneficial for the society. As you are aware these Companies are growing tremendously nowadays and the investors prefer this structure due to its simplified registration process and good working transparency resulting from the rather strict monitoring of the regulators. One can easily get a Company started with 2 Directors and Shareholders with an offer that the Directors and Shareholders can be the same persons.
Section 8 Company Advantages
- Members have limited liability.
- No minimum capital requirements.
- Enjoys several tax exemptions.
- Members who are directors can take remuneration prudently in return for any service (not being services of a kind which are required to be rendered by a member) actually rendered to the company.
- Perpetual existence and separate legal status.
- Reliable image due to strict Government regulations.
- More credibility than compared to NGOs, societies, and trusts because they are recognized by the Central Government’s license.
Section 8 Company Disadvantages
Despite numerous merits, these companies also have certain drawbacks:
● Members of the company cannot receive any dividend.
● Can only use the profits for furthering objectives of the company.
● Cannot issue Bonus shares to members
● Amendment of memorandum and articles requires Central Government’s permission.
● The license is revocable by the regulators on several grounds.
Consequently, the structure of both of the companies is quite similar but are absolutely different from each other in terms of their main objective and functioning. Investors generally prefer to conduct charitable activities by forming Section 8 companies instead of regular NGOs and associations, due its reputation and Limited Liability advantage.
III. Overview of Exemptions enjoyed by Section 8 Companies
- Section 8 Companies need to pay less stamp duty as compared to other companies, Stamp duty on Memorandum & Articles of Association of Section 8 or on any increase in share capital is governed by Indian Stamp Act, 1899 as adopted by respective state or stamp act of respective state, as the case may be, certain states offer privileged stamp duty rates for Section 8 Companies.
- There are numerous exemptions applicable to section 8 companies under Companies Act 2013, sections such as the non-inclusion of Section 8 companies for the purpose of counting maximum number of directorships that can be held by a person, a shorter General meeting notice period, non-applicability of nomination and remuneration Committee and a Stakeholders Relationship Committee, Section 8 Companies are exempted from the appointment of Independent Directors and certain KMP. There are many more exemptions for Section 150, 152(5), 160, 165(1), 178,149(1) (b) and many more provisions that are not applicable over Section- 8 Companies
- Under the Income Tax Act, 1961, the donors of Section 8 Company may claim a 50% rebate against the donations they made. Under Section 80G, it shall be valid for a period of one to three years.
- If Section 8 Company got registered under section 12AA (tax exemption) of the Income Tax Act, then its profits shall be entirely exempted, and no tax will be levied on the company.
IV. Analysis of Section 8 Company Vs, Private Ltd Company Structure
Following is an analysis of Section 8 Company and private Limited Company for clarifying the basic difference and similarities these structures share.
Requirement of Minimum Number Members: To start either a section 8 or a private Limited Company, a minimum number of 2 members is required.
Limited Liability: The liability of each member or shareholders of both forms of Company is limited. It means that if a company faces loss under any circumstances, then its shareholders are not liable to sell their own assets for payment. Thus, the personal, individual assets of the shareholders are not at risk.
Minimum Number of Directors: Both Companies need to have at least 2 persons as its directors, and at least one of them should be resident in India.
Paid up capital: There is no minimum capital requirement for Section 8 or Private Ltd Companies.
Format of Name: It is mandatory for all the private companies to use the word “private limited” after its name. However, in the case of section 8 Companies, the name need not carry the word “Private Limited/Limited” it can add the suffixes like “Foundation, forum, association, federation, chambers, confederation, etc in its name.
Restriction in Object clause: The object clause of MOA defines the scope of activities to be carried on by the Company upon registration. The object clause of a Section 8 company should contain broadly the following, since the nature of business should always be not for profit. However Private Limited Companies do not have such restrictions imposed on its objectives, as long as the proposed objects are legal and permitted under the law and is within the scope of a specific industry it proposes to operate in, the objective can contain a variety of activities.
Registration Process: The registration process of Section 8 and Private Ltd Companies are more or less the same, however they differ in required documents and charter documents of the Company. We are enclosing herewith our detailed proposal for both kinds of companies for your kind perusal.
Requirement of License to operate: Section 8 Companies, upon approval of Registration is granted a licence under Section 8(1) of Companies Act by the Registrar of Companies enumerating the conditions upon which the license is issued, this document is in addition to the Certificate of Incorporation and shall form part of constitutional document of the Company. Private Limited Companies are provided a Certificate of Incorporation upon registration, no license is issued separately as it is not applicable.
Sources of Fund: Section 8 company, primarily being a Not-for-profit organization shall be depending on grants and Donations for meeting fund requirement, the Board of the Company is empowered to make borrowings on behalf of the Company, this may be secured from banks/other financial institutions. Further the section 8 company could apply for CSR Funds of corporations once it fulfills the eligibility criteria. Private Companies often depend on their promoters and Directors for funds, in addition to this, they resort to borrowing from Banks and financial institutions and seldom third party investors as well.
Distribution of Profit/Surplus: The provisions of Companies Act 2013 does not permit Section 8 Companies to distribute dividends to its members out of profit or reserves, neither can the company use its accumulated surplus to issue bonus shares or buy back its own shares, the profit should be ploughed back into the furtherance of Business of the Company. On the other hand, a private Ltd Company can declare and pay dividends to its members after complying with the applicable rules, it is free to issue Bonus shares or buy back its shares provided specific compliances are met with.
Management of Affairs and remuneration: The Board of Directors shall be the authority charged with all major policy and decision-making activities. The Board is vested with the duty of acting in the best interest of the Company and they shall do so by managing day to day affairs of the Company, making timely decisions and complying with necessary legal requirements. Being the basic structure of Company form of business; this division of between shareholders and Directors shall remain the same in both section 8 Company and Private Limited Companies.
The private companies usually provide salaries/remuneration to its directors who render various services to the company, including professional or managerial services. This remuneration may be in the form of monthly salary, percentage of profits, perquisites, etc other than sitting fee. However, section 8 Companies are permitted to compensate only prudent remuneration to any of its members and officers in return for any services which are actually rendered, hence care must be taken to stay in compliance with the provisions of the Act while devising remuneration policies.
V. Receiving Foreign Donation and Applicability of Foreign Contribution Regulation Act (FCRA) Registration
Any Association having definite cultural, economic, educational, religion or social Programme and accepting foreign contribution shall take registration under Foreign Contribution (Regulation) Act, 2010. Therefore, charitable or religious Trusts, Societies, Section 8 Companies that receive foreign contribution or donation from foreign sources are required to obtain registration under Section 6(1) of Foreign Contribution Regulation Act, 2010. Such a registration under the Foreign Contribution Regulation Act, 2010 is called a FCRA registration. Private Limited Companies, however, cannot receive funds in form of Donation.
VI. Receiving Foreign Equity and Foreign Direct Investment Regulations
FDI is an important monetary source for India’s economic development. Economic liberalisation started in India in the wake of the 1991 crisis and since then, FDI has steadily increased in the country. Though the Private Limited Companies cannot accept donations, they can accept funds and issue Equity/Preference shares against the same.
This however may result in Equity dilution in promoter’s shareholding. In case such Fund is received from foreign investors the Company will have to follow RBI reporting guidelines for Foreign Direct Investment. Section 8 Companies can also raise Foreign Equity in addition to donations by complying with FDI Guidelines. Healthcare sector is where Foreign Direct Investment is allowed under 100% Automatic Route, i.e. the company does not require prior nod of the RBI or government of India for receiving FDI.
Both Private Limited Companies and Section 8 Companies can raise External Commercial Borrowings, ie Foreign Loans from recognized lenders provided the regulations set forth by the Government of India, which is enforced by the Apex Bank; RBI.