What’s better- Trust, Society or Sec.25 Company?

There are three different ways in which one can share good fortune with others in an organized and enduring manner and receive legal protection as well as tax benefits.

One can set up either a public charitable trust, a registered society, or a Section 25 Company (a trust corporation). Each has its own advantages and constraints. If a person wishes to set apart either property or money for a charitable purpose so that the income may be devoted in perpetuity for the fulfillment of the charitable activity, and wants to limit control over the disposal of that income to persons whom he knows and trusts, then it is best to set up a public charitable trust. A public charitable trust can be set up under the Bombay Public Charitable Trusts Act 1950 in Maharashtra or Gujarat. Elsewhere in the country it can be set up under the general law, i.e., by registration of the trust deed with the registrar. But a private trust whose beneficiaries generally are relatives or friends and not society at large does not enjoy tax benefits.

A minimum of only two persons are required to form a trust which can be set up by executing a trust deed on non-judicial stamp paper worth 4 per cent of the value of the trust property, with either the charities commissioner in Maharashtra or Gujarat or with the registrar of documents elsewhere. The trust deed enshrines the aims and objects and mode of management of the trust. The management rests with the board of trustees who can remain so for life, and need not stand for election. Changes in the composition of the board are usually by invitation and not election. This ensures that the trust is managed by those approved by the original donor/s or trustee/s who cannot be removed by election as in the case of a society. There is thus minimum danger of a takeover by persons not approved by the trustees or settler.

The disadvantage is that the alteration of the objects laid down in the trust deed is difficult and only the settler can modify them. The charities commissioner also has more power to intervene in the affairs of a trust than in a society, and a trust cannot be dissolved easily. Hence a trust should be set up only when one wishes to make an endowment of property for perpetuity and the trustees desire that this property be used only for specified charitable purposes with close control by the original settlers/trustees.

Alternatively, one can set up a registered society under the Societies Registration Act of 1860 or its versions in force in different states. Unlike trusts, a society has a more democratic set up with membership and an elected body to manage the society. The original members of a society can continue to remain in control as long as they are elected to the managing committee, but at the same time can opt out of the society if they wish, which trustees cannot. The society can exist as long as the members wish, but there is always a possibility of complete renewal of members and objects can be modified easily. It is easier to wind up a society than it is to wind up a trust. A minimum of seven members are required to form a society. They have to file a memorandum of association on non-stamp paper, setting out the objectives of the society before the registrar of societies in the state in which the society is set up. The legal requirements are much simpler than in the case of a trust or Section 25 companies. But the main disadvantage is that due to democratic procedures, the society can be taken over by elements opposed to the founding members.

For an individual who wishes to create a nonprofit concern for charitable purposes as an adjunct to his main business activities it would be best to create a Section 25 company under the Indian Companies Act of 1956. Only seven members are required to set up a nonprofit company. The main instrument is the memorandum and articles of association filed on non-stamp paper before the registrar of companies.

Its advantages are that a wide range of activities can be taken up. Though complex, its objects can be modified if need arises, and providing services and trading on a no-profit basis is possible. The management is with the board of directors and prevention of takeovers is easier than in a society. However, under company law, the formation and regulation procedures are more complex than in either a trust or society.

In sum the type of legal incorporation to be chosen would depend mainly upon requirements and preferences. All three types of organizations can hope to get tax benefits provided they meet the necessary criteria, though.

This article has been Authored by Mukul Gulati. He can be reached at avsm.pegasus@gmail.com