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Structuring non-profit ventures

  (See Section 17A of the Income Tax Act)

A non-profit vehicle may be structured as a trust, a society or a company which is registered under Section 25 of the Companies Act.


(Image- Types of non profits; Click to zoom)

A. Trust

Trust is a common form in which charitable and non-profit ventures are structured. Only certain kind of trusts are eligible for tax benefits, but it is useful to have overall understanding of different kind of trusts since all of them are used in structuring for various purposes.

A trust usually involves transfer of property from one person to another, where the transferee manages the property for the benefit of an identified person or a class or persons.

The transferor is called the settlor, the person to whom legal ownership is transferred is called the trustee, and the person for whose benefit the trustee must act is known as the beneficiary. The diagram below shows how ownership of property is transferred by creation of trust, through a trust deed.


(Image- Transfer of ownership by creation of Trust; Click to zoom)


A trust takes into account two concepts of ownership – legal and beneficial. The legal owner of a trust is called the trustee. However, despite being the legal owner, the trustee is not free to act as he wishes – his actions must always be taken for the benefit of the beneficial owner. 

In addition to his specific obligations under the trust deed, general obligations of a trustee are laid out under specific statutes applicable to private and public trusts.

Types of trusts


Trusts are of two types – private and public. Private trusts are typically created for the benefit of identified persons. In a private trust, the beneficiaries are one or more ascertainable individuals.

Example of a Private Trust
A businessman may transfer a certain portion of his property to a trust which is to be held by a trustee for the benefit of his children. Here, the trust is being held for specific individuals– that is, the children of the businessman. In this case, the children become the beneficial owners while the trustee is the legal owner.
On the other hand, public trusts are created for a social or charitable purpose. In a public trust the beneficiaries are a body of uncertain or fluctuating individuals and may consist of a class of the public or the whole public.


Example of a Public Trust
A company creates a trust and transfers a piece of land to the trust. As per the trust deed, a park must be developed on that land for the benefit of the general public, or the residents of a particular city. Here, although the beneficiaries are a class of people (i.e. the residents of a particular city), the actual membership of the beneficiary population will fluctuate.

A public trust may be created by a person when he is alive or by a will. A public trust created through a will can only take effect after the death of a person.

Key issues related to trusts

 Who can create a trust? 

Every person who has attained the age of majority, is capable of contracting and can transfer property, can create a trust. Even corporate personalities and other forms of organizations can create a trust. For example, a Company, LLP, or a Partnership can also create a trust.

2. Who can be appointed as a trustee?

Every person who is capable of holding property can become a trustee. However, where the trust involves the exercise of discretion, he can accept or act the position of a trustee only if he is competent to contract.

The trustees should signify their assent for acting as trustees to make the trust a valid one. Once a public trust is created and the property is transferred to it, it cannot be revoked.


3. What happens if no trustee is appointed, or if the trustee sought to be appointed refuses to be appointed as trustee?
The person sought to be appointed as a trustee must accept such appointment. No one is bound to accept trusteeship.

However, a trust is not defeated for lack of a trustee. Where no trustee is appointed as per the terms of the trust or the person named in the trust deed refuses to act as the trustee, an official trustee may be appointed by the court to administer the trust.

4. Process of creation of a trust

a)Trust in respect of immovable property: A trust in respect of immovable property – e.g. land, a building, house, an apartment or a park must be created by a written instrument signed by the author of the trust, or the trustee, which is stamped as per the Stamp Duty legislation prevailing in the state, and must be mandatorily registered.

Trust in respect of movable property:
If movable property is the subject matter of a trust– e.g. shares, bonds, jewellery, etc. no formal document or written agreement is necessary in law, but it is advisable to have a written and stamped trust deed which records the terms of the trust, for the purpose of clarity, and for evidentiary purposes in the event of disputes.


Registration and stamping requirements

A trust deed must be registered with the Sub-Registrar as per the provisions of the Indian Registration Act, 1908. The trust deed must also be stamped at the rate specified in the state where it is created. For example, stamp duty on a trust deed which involves a transfer of property in Mumbai, is approximately 2% of market value of the property, if the trust is created for religious or charitable purposes as per the Bombay Stamp Act, 1958.

  1. Legislations relating to ‘public trusts’

Most states have passed special laws for public charitable trusts. For example, in Maharashtra and Gujarat, non-profit ventures may be required to register under the Bombay Public Trusts Act, 1950 if they qualify as ‘public trusts’, that is, ventures constituted for a public or charitable purpose.

Relief of poor, education, medical relief, provision for facilities for recreation or other leisure time occupation (if such facilities are provided for public benefit) are all considered for charitable purposes under the Bombay Public Trusts Act.

NoteEven if a non-profit is structured as a society under Societies Registration Act or under Section 25 company under the Companies Act (see below), it may have to comply with the relevant state legislation relating to public trusts, if it qualifies as a public charitable trust.

Registration authority under the Bombay Public Trusts Act
: A public trust in Maharashtra or Gujarat would have to make an application as per Form II of the Bombay Public Trusts Rules, 1951 to the Assistant or Deputy Charity Commissioner at the Public Trusts Registration Office of the concerned area, within 3 months of its creation.

The duty to obtain registration is placed on the trustee or manager of the trust or society (as
applicable). Non-compliance will attract a fine of Rs. 1000.

 Can a trust be terminated or revoked?


a) Public trust:

Public trusts are irrevocable in India. If a public trust becomes inactive due to the negligence of its trustees, the Charity Commissioner authorized under the relevant state act may take steps to revive the trust. Furthermore, if it becomes too difficult to carry out the objects of a trust, the doctrine of cy-pres may be applied. The doctrine enables courts to alter the terms of a trust to further the purpose of the trust. Thus, in the event the trust can no longer accomplish its initial purposes, its purposes would be changed to another similar public charitable purpose, or in the event of a distribution or winding up of a trust due to changed circumstances, the assets of the trust would be used for similar charitable purposes.

The property of a public charitable trust may also be transferred to another public charitable trust.


A lawyer dies, and by his will creates a trust to provide Rs. 10 lakhs per year to a bird sanctuary located near his house. The payments are made for several years, until a lightning strike hits the sanctuary and burns it to the ground.  The owners decide to relocate to a new location several miles away. Because the trust was very specific in the location of the sanctuary to be paid, without any modification, the relocated bird sanctuary would not have access to the funds. The courts, however, could look at all the evidence (to deduce the intent of the deceased), and decide that the location was irrelevant to his decision to grant the money; he simply wanted to help the birds.  The court then would use the cy pres doctrine to alter the terms of the trust so that its true purpose (the protection of birds) shall continue. 

b) Private trust:

A private trust can be revoked in the following ways:

  • By the consent of all the beneficiaries
  • By the settlor (that is, the person who had initially transferred property and created the trust), if there are powers of revocation reserved by him as per the trust deed.

A trust created for repayment of debts can be revoked by the settlor at any time irrespective of whether the debt is repaid or not. However, if the creditor has knowledge of the creation of the trust, it cannot be revoked without the consent of the creditor, until the debt is repaid.

B. Societies

Under Indian law, a society can be constituted for any literary, scientific or charitable purpose, or for any such purpose as is described in the Societies Registration Act. The purposes for which societies can be created are:

  • charitable societies, the military orphan funds or societies established at the several presidencies of India
  • for the promotion of science, literature, or the fine arts
  • for instruction, the diffusion of useful knowledge, political education
  • 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.
    [Section 20, Societies Registration Act]

A society must have a minimum of 7 members. There is no restriction on the maximum number of members that it can have. The activities of a society are governed by its Memorandum of Association, along with any document describing the rules and regulations made for its governance. These documents must be filed with the Registrar of Societies at the time of creation of the society.

1.Procedure for governance of a society’s affairs

The day to day activities of a society are governed in the manner specified in its rules and regulations. Usually, the governing body comprises of people designed as the Governors, Council, Directors’ committee or Trustees.

A society will have to comply with certain regulatory requirements as per the applicable state rules, such as:

  • maintaining books of accounts,
  • conducting an audit of accounts,
  • filing financial statements and audit reports with the Registrar of Societies
  • maintaining lists of members,
  • filing a list of the members of the governing body on an annual basis

2.Distribution of profits and dissolution

A society cannot distribute its profits even upon its dissolution by members, although its debts and liabilities may have been satisfied. As per Section 14 of the Societies Registration Act, 1860 any surplus profits must be given to another society, as determined by 60% of the members, or in their absence, by the Court.


3.Understanding the legal framework governing societies

Unlike companies, the rules applicable to societies differ from state to state. Although the obligations and compliance requirements under the rules are not difficult. An early stage business must first be able to identify the correct set of rules that are applicable to it in order to begin compliance with them. Once you have done that, the relevant legislation and rules can easily be obtained on the internet or in a law bookstore.

A brief explanation of the acts applicable to societies is provided below, after which we have provided a simple flowchart for you, so that you can identify the correct rules on your own for a society located in any state.

Societies across India may be governed by the Societies Registration Act, 1860 or the law made by the state legislature (of the state where the society has been formed). Some states have enacted specific laws to govern societies. For example, societies in Delhi and Maharashtra are governed by the Societies Registration Act. However, societies in Karnataka are governed by the Karnataka Societies Registration Act, 1960.

Even in states where there is no specific act to govern societies, state governments have passed rules to govern some of the procedural aspects of societies. In such cases the rules passed by the state government must be read jointly with the Societies Registration Act, 1860. For example, in Maharashtra, societies will be governed by the Societies Registration (Maharashtra) Rules, 1971 will apply along with the provisions of the Societies Registration Act, 1860.


C. Section 8 companies (Section 25 companies under the Companies Act, 1956)

Under the Companies Act, companies incorporated for promoting commerce, art, science, religion, charity or any other useful object may be permitted by the Central Government to drop the word “Limited” or “Private Limited” from their name. Such companies must apply profits for promoting their objects and prohibit the payment of any dividend to its members. These companies are known as “Section 8 companies”.


Their rights and obligations are the same as those of other limited companies – their capital is owned by shareholders, and their day-to-day affairs are managed by a board of directors. The only difference is that they are not required to append the word “Limited” at the end of their name. Unlike other companies, Section 8 companies enjoy the same tax benefits as trusts.


Step Outline for Incorporation of a Section 8 Company
( Note: Please read this document with the Step Outline for Incorporation of a Company)

The procedure for incorporating a Section 8 company is similar to incorporation of a private limited company, with a few additional steps. You may use the
Step Outline for Incorporation of a Company uploaded on the learning management system for reference. The steps are briefly summarized below:


  • Steps 1 - 3: See Steps 1, 2 and 3, i.e. until submission of Form INC-1, in the file Step Outline for Incorporation of a Company
  • Step 4: Application to Registrar for grant of licence

For grant of license (to drop the word ‘Limited’ or ‘Private Limited’ from the name of the company, an application must be made by the promoters to the Registrar in Form INC-12. 


Essential details that must be mentioned in Form INC-12 are:

  • Brief description of work proposed to be carried out after incorporation, the reasons for the application, and details of promoters
  • Memorandum & Articles of Association, executed by the Promoters
  • Declaration in Form No. INC-14 by a Chartered Accountant, an Advocate of a Supreme Court or of a High Court or a Company Secretary, stating that the Memorandum & Articles have been drawn up in accordance with the provisions of the Companies Act.
  • Statement showing estimates of future income & expenditure for the next three years
  • Declaration must be made in Form No INC-15 by the persons making the application.

Step 5: Publication in newspaper (only for existing companies which want to convert into Section 8 companies)

Within seven days of making the application, a notice is to be published once in English language in English Newspaper and one in vernacular language in local newspaper circulating in the district in which the registered office is proposed to be situated, inviting objections to the application for grant of license (the notice must be as per the specifications provided in Form No. INC-26). A copy of the notice must be sent to the Registrar. Such a notice must provide 30 days for sending objections. The Regional Director shall consider all objections received by him before grant of license. The Regional Director may specify that the company must insert particular terms or conditions of the license in its constitutional documents.


  • Step 6: Registration of the company

After obtaining the license, the following documents must be executed and submitted to the Registrar of Companies for registration:

Memorandum and Articles of Association -

These are required to be executed by the promoters in the presence of a witness. The Memorandum must be identical to, or as similar as possible to the format given in Annexure I of the Companies Regulations.


Form INC-7 - This is the application form for incorporation of a company.  The memorandum and articles need to be attached with this form. Further, it requires a declaration by a whole-time Chartered Accountants, Company Secretary, or an advocate practicing in the High Court or Supreme Court stating that the requirements for incorporation under law have been complied with.

Form INC-22 – This form is filed to inform the Registrar of the registered office of the proposed company.

Form DIR-8 - This is a form stating the fact of appointment of the proposed directors on the board of directors from the date of incorporation of the proposed company and is signed by one of the proposed directors.


Note: Fees payable to the Registrar of Companies for various form filings are provided in the annexure.
(For more details, see the Companies (Incorporation) Rules, 2014)

D. How should one choose an appropriate vehicle for his non-profit venture?

While trusts, societies and Section 8 companies all have similar tax benefits, the point on which they majorly differ are management and control. The governance structures in each of these entities are entirely different and are suitable for different purposes.

i. Society:

Societies are more democratic than other forms of non-profit organisations. When democratic participation of members in the decision making process is the goal, societies will be preferred. Founders can exercise relatively higher control, if they hold lifelong posts in the managing committees and prescribe this in the constitutional documents of the society. Similarly, they may also be able to grant themselves veto powers through the constitutional documents in decision making processes.


Trustees can exercise very high level of control on activities of the trust. Even the entire board of trustee may not participate in effective decision making. Often trust deeds vests all effective decision making power in a single person, such as a managing trustee or the secretary of the trust. Hence, for founders who would like to retain very high level of control on decision making and economic matters of the organisation, trust is a preferred form.


iii.Section 8 company:

Governance of a Section 8 Company is the same as a normal company (except that there is no provision for distributing profits through dividends to shareholders). Like a normal company, the executive actions as well as day-to-day activities of the company are decided on and carried out by the board or officers authorised by the board. The shareholders can appoint and fire the directors or the entire board, thus exercising ultimate control over the company.

From a founder’s point of view, if he would like to retain control over the company in the long term, he must retain majority shares. It is a good vehicle for non-profits since new shares can be issued to donors and employees, thus giving them some control (e.g. voting rights proportionate to their shareholding), which will provide a feeling of being a stakeholder in the venture and ensure a higher level of participation in decision making. This can be done without diluting the ultimate control of the founders over the organization, which is why Section 8 companies are preferred by many.

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