In India, the decision for an organization to go for a Business Registration (Company & Others) or as an NGO (Non-Governmental Organization) depends on several factors, including the organization’s objectives, goals, and nature of activities. Below is a detailed explanation of these factors, how the objectives influence the decision, and the merits and demerits of each type of registration.
Factors Influencing Organizations to go for a Business Registration (Company & Others) or as an NGO
- Objectives and Goals:
- Company & Others: Typically established for commercial and profit-making purposes. Companies aim to engage in business activities, generate profits, and distribute dividends to shareholders.
- NGO: Established for social, charitable, educational, or non-profit objectives. NGOs aim to serve the public interest and do not distribute profits to members or trustees.
- Legal Structure and Compliance:
- Company & Others: Governed by the Companies Act, 2013. Can be registered as a Private Limited Company, Public Limited Company, One Person Company, etc. Requires adherence to stringent compliance and regulatory norms, including annual filings, audits, and board meetings. Other forms of profitable structures of organization are Proprietorship, Partnership and LLP. Partnership and LLP bears separate PAN in the name of the business, whereas Proprietorship operates with same PAN as that of the owner. That is, for proprietorship, all income tax obligations lies with the owner itself. On the other hand, proprietorship and partnership have unlimited liability for promoters, LLP has limited liability advantage like Company.
- NGO: Can be registered under various acts, such as the Societies Registration Act, 1860, the Indian Trusts Act, 1882, or the Companies Act, 2013 (as a Section 8 Company). In India, Societies and Trusts operate under the regulations of respective State Governance. Compliance requirements vary based on the type of registration but are generally less stringent compared to companies.
- Funding and Financial Management:
- Company & Others: Primarily funded through equity, debt, and other commercial means. Shareholders invest in the company with an expectation of returns.
- NGO: Funded through promoters subscriptions, donations, grants, and contributions from individuals, corporates, and government bodies. Focus on transparency and accountability in fund utilization.
- Profit Distribution:
- Company & Others: Profits are distributed to shareholders in the form of dividends on a decided periodical basis for companies, whereas for other formations promoters may share their profits any time.
- NGO: Profits (or surplus) are reinvested in the organization’s activities to further its objectives. No profit distribution to members or trustees.
- Taxation:
- Company & Others: Subject to corporate tax on profits, starting from 25% of profit. Eligible for certain deductions and exemptions based on the nature of business. For proprietorship, as individual PAN is used, normal tax policy for individuals is applicable. For partnership and LLP, tax liability starts from flat 30% of profit.
- NGO: Eligible for various tax exemptions and benefits under the Income Tax Act if registered under Section 12A. Donations to NGOs may also provide tax benefits to donors if registered under 80G.
How Objectives Influence the Decision
The primary objective of the organization plays a crucial role in determining whether it should be registered as a company& others or an NGO:
- Profit-Making Objective: If the organization’s primary goal is to engage in commercial activities, generate profits, and distribute these profits among its shareholders, it should be registered as a company. This structure allows for better access to investment and growth opportunities.
- Non-Profit Objective: If the organization aims to work for social, charitable, or educational purposes without a profit motive, it should be registered as an NGO. This structure enables the organization to access grants, donations, and other forms of funding aimed at public welfare.
Merits and Demerits
Company & Others
Merits:
- Profit Motive: Ability to generate and distribute profits.
- Attract Investment: Easier to attract investment from venture capitalists, angel investors, and the public (in case of public companies). Proprietorship and Partnership formations are on the other hand not suitable to attract external investments.
- Growth Opportunities: Potential for growth, expansion, and scaling operations.
Demerits:
- Compliance Burden: High compliance requirements and regulatory scrutiny.
- Cost of Incorporation: Higher costs associated with incorporation and maintenance.
- Profit Pressure: Continuous pressure to generate profits and deliver returns to shareholders.
- Taxation: Subject to corporate tax rates, which can be significant.
NGO
Merits:
- Social Impact: Focus on social welfare, education, health, and other charitable activities.
- Tax Benefits: Eligible for tax exemptions and benefits under the Income Tax Act.
- Funding Opportunities: Access to grants, donations, and CSR (Corporate Social Responsibility) funds.
- Public Trust: Higher public trust and credibility due to non-profit nature.
Demerits:
- Funding Challenges: Dependence on donations and grants, which can be uncertain and irregular. Its difficult for the promoters to subscribe or run expenditure of the NGO on his/her own, as in return, he/she is not entitled to any return.
- Compliance Requirements: Although less stringent than companies, NGOs still need to comply with various legal and regulatory norms.
- No Profit Distribution: Inability to distribute profits to members or trustees, which can limit financial incentives.
- Operational Limitations: May face operational and financial constraints due to reliance on external funding.
Conclusion
The decision to register as a company & others or NGO should be guided by the primary objectives and activities of the organization. If the focus is on profit-making and business activities, registering as a company is appropriate. Conversely, if the aim is to work towards social, charitable, or educational causes without a profit motive, registering as an NGO is the suitable choice. Both structures have their unique merits and challenges, which should be carefully considered in alignment with the organization’s mission and goals.
by Corporate Advisory, TRUSTLINK
