Definition: Non-Profit Organization, as the name signifies a type of organization that does not operate with the purpose of making a profit, rather, it works for a social cause. NPOs are legally and voluntarily registered entities, run by a group of people with a service motive, so as to promote the general welfare of the public.
The money earned in the form of revenues or the profits made by the organization, from various activities, are used for the promotion of its objectives and not distributed among its members as dividends.
It may include Non-governmental organization (NGO), Not-for-Profit Organization (NFPO), corporations, foundations, trusts, and cooperative societies that promote charitable, religious, environmental, social, scientific, educational, health, and literary purpose.
Examples of Non-Profit Organization
Some popular Non-Profit Organization which is based in India are:
- A.P.J. Abdul Kalam Centre
- C. P. Ramaswami Aiyar Foundation
- BHUMI (organization)
- Micro Tech Global Foundation
- Digital Film Makers Forum
- Foundation for Democratic Reforms
Characteristics of Non-Profit Organization (NPO)
- Source of Income: Subscription fees from the members, donations, grants, and income from investments, are the primary source of income of the NPOs.
- Service-Oriented: It is dedicated to providing benefits or services to the public at large.
- Forms: These can take the form of:
- Charitable trust by executing a trust deed
- Society under the Societies Registration Act, 1860
- Section 8 companies under the Companies Act, 2013.
- Members: People who subscribe for its membership, are termed as members.
- Capital Fund: Money raised from different sources is transferred to a capital fund or general fund.
- Governance: It is an autonomous body, which is governed by the board of trustees or managing committee, which includes individuals, who perform their duties in a fiduciary capacity.
- Non-profit making: They do not work with a profit motive, as they are restrained from distributing the remaining part of the profit to the members.
- Surplus: Any amount which is in excess, of the expenditure, is called a surplus, which is taken to capital fund account.
- Tax Treatment: Irrespective of the form in which the non-profit organization is registered, all the form are treated equally under the Income Tax Act, 1961, i.e. tax is exempt and 80G certificate is granted by which the people who donate their money to the NPOs can get rebate against the money donated.
- Employees: NPOs have employees and volunteers, who get a salary, for the work performed by them for the organization.
Forms of Non-Profit Organization
The formation of public charitable trust takes place, when property, i.e. land, and the building are involved. A trust deed has to be executed which lays down the aim, objectives, management mode, minimum and maximum number of trustees, appointment, and removal of trustees.
Further, different states have different Trust Acts, however, in the absence of the act in any state or union territory, the Indian Trust Act, 1882 becomes applicable.
Under Section 20, Societies Registration Act, 1860, societies like charitable society, military orphan fund, societies set up for the promotion of science, fine arts, literature, education, can be registered under the act.
In the case of societies Memorandum of Association (MOA) plays a significant role which states the rules and regulations, aims, and objectives of the society.
Section 8 Companies
Section 8 Companies of the Companies Act, 2013 cover those not-for-profit companies that are set up for the promotion of commerce, art, sports, education, science, social welfare, religion, environmental protection, and so forth.
These companies are required to use their income for furthering the objectives and prohibits the division of profits among their owners.
Formation of Non-Profit Organization
Registration of Non-Profit company under section 8 as NGO involves the following process:
- First of all, check the availability of the intended name. And to do so, you need to fill the relevant form without adding a suffix like limited or private limited, and submit the same with the Registrar of Companies (ROC), with the stipulated fee. Also, give three other names on the basis of preference, so that if the desired name is not available another name can be chosen.
- Once the name is available, write an application to the Regional Director (RD) of the Company Law Board (CLB). The application should be given online, along with copies of MOA and AOA. It should contain the details of all the promoters and it must be duly signed by all. It should also contain a declaration, by a registered Chartered Accountant that all the provisions relating to the Act have duly complied.
- A statement indicating the assets and liabilities along with its estimated value, sources of income, estimated future annual income, and expenses of the NPO has to be submitted with the application or within 7 days of submission of application.
- A short description of the work to be undertaken by the company has to be submitted after the registration.
- Members signing the application are required to make a declaration that they are participating in it, on their own will and they are under no influence or pressure of any person.
- Submit a copy of the application and all other documents, to the Registrar of Companies of the concerned state where the company is based.
- Publish a notice in the specified format in the vernacular newspaper and English newspaper of the state, within seven days of submitting the application to the Regional Director.
- Regional Director will check the application thoroughly and when there is no objection and he shall discuss the same with the relevant authorities to determine if the applicant will get the incorporation or not, with 30 days. He may also consult the State Government if required. Thereafter copy is sent to ROC, who will consult with the District Magistrate (DM).
- On receiving the review of the DM in this regard, the RD can decide on granting license to the applicant.
- If there are any changes in the MOA and AOA, the regional director may recommend the same.
- Further, the applicant has to obtain a license, and once it is done, he/she can incorporate the company by submitting the required form.
A Word from Business Jargons
So, a Non-Profit Organization does not mean that the organization cannot earn a profit, rather it earns profit, but it is not distributed to its owners.