Chapter V - Trust, Society or Company?

An organisation established for charitable purpose in India has the choice to register either as a public charitable trust under the Public Trusts Act applicable in the state where it chooses to register or as a charitable society under the Societies Registration Act 1860 or as a company licensed under Section 8 of the Indian Companies Act 2013.

One of the key issues in non-profit governance in India is lack of uniformity and standardisation. Since 'charity' is a state and not a central subject in India, some states have excessive regulations while others have virtually none. For example, in India, in the states of Maharashtra and Gujarat the charity commissioner requires regular 'change reports' to be filed, as also prior permission for buying and selling of immovable property. On the other hand, the national capital of the country does not have a charity commissioner. Nor do most other states. It is no surprise therefore that, in India, many new nonprofits attempt to seek registration in New Delhi.

Another factor is the diversity in legal choices. One may literally choose a type that requires the least compliance. While societies and nonprofit companies require a modicum of accountability including Annual General Meetings and Annual Reports for members, trusts are exempt from this requirement. Also, while societies and non-profit companies require periodic rotation on boards by a process of nomination and election, trust boards are usually static. Trusteeship is usually for life and new trustees are appointed by surviving trustees.

In India, it is not uncommon to find boards that are remunerated for their service. The law generally allows 'reasonable remuneration' provided there is also an enabling provision for it in the Trust Deed or the Rules or Articles of Association, as the case may be.

The relationship between boards and the Chief Executive is also an issue that merits deeper attention and understanding. Sometimes it is the CEO that drives the organisation while the Board remains passive and at other times it is the reverse. Both situations are undesirable. There should be healthy respect, communication, interaction, and a system of 'check and balance.'

Public charitable trust

States like Maharashtra, Gujarat, Rajasthan, and Madhya Pradesh have a Public Trusts Act in force as also the office of the Charity Commissioner. For example, The Maharashtra Public Trusts Act 1950 is applicable throughout the state of Maharashtra and the office of the Charity Commissioner regulates all public charitable trusts registered in the state of Maharashtra. However, several other states and union territories in India do not have a Public Trusts Act or any regulating authority like the Charity Commissioner. In such territories one may simply register the trust deed under the Indian Registration Act with the sub-registrar's office.

In states or union territories where there is no charity commissioner, a public charitable trust would remain unregulated, at least at the state regulatory level and trustees would be saddled with lesser regulatory compliance at least at the state level. The Indian Trusts Act 1882 is applicable to private and not public charitable trusts. However, the broad principles of this Act would serve as guiding principles for governance and in the absence of a state appointed charity commissioner, whenever required, courts would have jurisdiction and the power to administer or regulate such trusts.

In states like Maharashtra or Gujarat where there is a charity commissioner, at least three founders are required to form a trust. In other states, two would suffice. In addition to being majority age, a trustee must be competent to contract, which requires that he or she be 'of sound mind' and 'not disqualified from contracting by any law to which he/she is subject'.

Generally, two or more trustees may manage a trust. The charter or trust deed generally specifies the minimum and maximum number of trustees the trust may have. Unless specified in the trust deed, the trustees may remain trustees for life. Trusts do not have members and as such, there is no necessity for annual general meetings or annual reports for members or periodic elections. Trustees may lay down office by putting in a resignation letter before the board. The surviving trustees may appoint new trustees by invitation.

The governance of a trust or who controls the trust (i.e., members of one family or a company) does not determine the public nature of a trust. What is essential, is whether the trust is for the benefit of the public. All the properties (movable and immovable) of the trust legally vest in the trustees and all trustees are jointly and severally responsible. The board of trustees generally meets as often as required. Ideally, the board may meet four times a year (i.e., every quarter). However, this may vary. Often, procedures for calling and conducting meetings are laid down in the trust deed. Seven to fifteen days prior notice is generally adequate. The chairman presides over all meetings of the board and usually enjoys a casting or additional vote in case of a tie.

A trustee must not, in any way, make use of the trust property or of his position as a trustee for his own interest or private advantage. Nor may he enter engagements in which he has or can have a personal interest which conflicts or possibly may conflict with the interest of those whom he is bound to protect. A trustee cannot delegate any of his duties, functions and powers to a co-trustee or any other person though, as a rule, executive acts may be delegated. However, where a trustee is required to exercise discretion, he must exercise the discretion personally and cannot delegate it. In principle, a trustee cannot buy the property of the trust himself and he cannot sell any of his properties to the trust either - the mischief in both the cases being the likelihood of a conflict between his interest and his duties as a trustee. Trustees, as a rule, should govern the trust without expecting any remuneration - voluntary service being the foundation underlying all trusteeship.

Charitable society

The Registrar of Societies appointed by the state regulates societies established for charitable purpose under the Societies Registration 1860. This central law has been adapted by various states. In states where there is a charity commissioner and a Public Trusts Act in force, societies are also registered as public charitable trusts. Thus, in states like Maharashtra and Gujarat, societies have dual registration as society as well as public charitable trust and must comply with regulatory requirements of both laws.

As per Societies Registration Act 1860, Societies can be formed by seven or more persons subscribing to the Memorandum of Association of the Society and registering it with the office of the Registrar of Societies. As per Section 20 of the Societies Registration Act 1860 the following societies may be registered under this Act: 'Charitable societies, the military orphan funds or societies established at the several presidencies of India, societies established for the promotion of science, literature, or the fine arts, for instruction, the diffusion of useful knowledge, the diffusion of political education, the 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.'

While under the aforesaid Section 20, societies may be registered for several purposes, what is important is the fact that charitable societies can be registered under this Act. At least seven members are required to form a society. These seven by default become members of the first governing board of the Society. There are generally no specific qualifications for the founders of a society. A society is required to have a general body of members with the power to vote at general body meetings, elect members of the managing committee or remove them if their performance is unsatisfactory, call for special meetings and demand examination of accounts and other records.

Members of the managing committee may hold office for such period as may be specified under the bylaws of the society. They may also stand for re-election. Members of the managing committee may meet as often as required, and they must call a general body meeting once a year. Procedures regarding meetings are generally specified in the society's bylaws.

Members of the managing committee generally serve in a fiduciary capacity and usually appoint among themselves a president, secretary, and treasurer. Managing committees are usually headed by a president who chairs all meetings, a vice-president, a single secretary, or joint secretaries who keep all records, call meetings, set agendas, keep minutes and a single or joint treasurers who handles overseas accounts and financial matters.

Membership of a society may be open to either individuals or institutions or both. A society may also offer various categories of membership (e.g., Patron, Institutional, Associate, Life, and Ordinary) with different fees/ subscription structures and rights and privileges. Applications for membership may be made in writing in a prescribed form and the managing committee usually reserves the right to reject any application for membership without assigning any reason. The managing committee may also close membership (i.e., stop accepting new applications) from time to time.

The general body of members delegates the management of the day-to-day affairs of the society to the managing committee. Issues arising at meetings of the society are usually decided by a majority of votes of the members present and in the case of equality of votes, the chairman of the meeting usually has a second or casting vote. Societies usually lay down the minimum number of members necessary for a quorum at either the managing committee or general body meetings. It is usually the duty of the secretary to keep a record (minutes) of the various meetings.

The business at Annual General Meetings is usually to receive and adopt the audited statements of account, the report of the managing committee, appointing the auditor and fixing his/her remuneration, elect members of the managing committee and discuss the general work, policy, and future programmes of the society. Notice for all meetings must be sent well in advance specifying the date, time, venue, and business. A meeting may be adjourned if there is no quorum. Bylaws of a society may be amended from time to time by the members of the general body.

Company licensed as a non-profit

The Registrar of Companies regulates companies licensed under section 8 of the Indian Companies Act 2013. This is a central law and applies uniformly throughout the Republic of India. Section 8 is a provision under the Indian Companies Act 2013 (it used to be Section 25 under the earlier Indian Companies Act 1956) which states:

Section 8 formulation of companies with charitable objects, etc.

Thus, the Registrar of Companies may register what is commonly known as a 'Section 8 company' if the company intends to promote commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object and not distribute profits, if any, to the company's members or shareholders. The essence of what is a 'non-profit' or a 'not-for-profit' entity comes through very clearly under this provision of the Indian Companies Act 2013. Non-profit does not mean loss making as some erroneously seem to think. Non-profit means 'non-profit distributing'. Profits made, if any, are ploughed back within the company to further the company's objectives. Though not specifically stated under the Public Trusts Act or the Societies Registration Act 1860, the same principle of 'not-for-profit distribution' applies to both public charitable trusts and charitable societies.

One may incorporate the company licensed under Section 8 as either a private or a public company and with share capital or limited by guarantee. Thus, a company licensed under Section 8 of the Indian Companies Act may be limited by guarantee or limited by shares. Two or more members (who by default may become directors of the governing board) are required to register a private Section 8 company.

A company limited by guarantee is a distinct legal entity from its owners and is responsible for its own debts. The personal finances of the company's guarantors are protected. They would be responsible only for paying company debts up to the amount of their guarantees. 'Limited by shares' means that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e., the nominal value of the shares.

There are several reasons why Section 8 companies have become a popular choice for registration. However, the key attraction appears to be 'limited liability' available to all companies including companies licensed under Section 8. Limited liability is a form of legal protection for shareholders and members that prevents individuals from being held personally responsible for their company's debts or financial losses.

The choice

All three choices of registration are good and valid, and each choice of registration has its own merit on a case-to-case basis. What is important to note is the fact that both the Income Tax Act 1961 and the Foreign Contribution Regulation Act 2010 do not discriminate between any of the three choices. The same provisions of Income Tax and FCRA apply to all three.

Trusts registered in states other than Maharashtra, Gujarat, Madhya Pradesh, and Rajasthan can legally bypass at least one regulating authority (i.e. charity commissioner) because most other states, including the National Capital, Delhi, do not have a Public Trusts Act (state legislation) nor an office of the Charity Commissioner. Societies which are registered under the Societies Registration Act 1860 in Maharashtra and Gujarat State are by default required to also register as Trusts under the Trusts Act.

Companies seeking registration under the Indian Companies Act are required to go through a name approval process. This process ensures that there is no other company registered in India under a similar name. However, there is no such process or procedure laid down at the state level for trusts or societies. As a result, there are instances of several trusts and societies registered under the same or similar name.

For all three legal forms of NPOs, there are no restrictions on an organisation's incidental business, commercial, or economic activities, provided that the NPO is established for and primarily carries out activities for the relief of poverty, education, medical relief, preservation of the environment (including watersheds, forests, and wildlife), monuments or places or objects of artistic or historic interest. The NPO must maintain separate books of account for business, commercial, or economic activities, and any profits received must be applied fully towards charitable objects. However, an organisation that has as its purpose the advancement of 'any other object of general public utility' may not generate business income more than twenty per cent of its total income from donations, grants, and other non-business receipts. If the above conditions are not satisfied, the NPO would lose its income tax exemption and its income would be liable to taxation at the maximum marginal rate of tax.

The following table will help understand the key differences and some similarities between trust, society and a company licensed under Section 8 of the Indian Companies Act 2013.