Difference Between Trust, Society And Section 25 Company

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    Difference Between Trust, Society And Section 25 Company

    2021/03/02 at 10:53 AM, 12836 Views

    Here is a competitive analysis between Trust, Society, and Section 25 Company (further referred to as Company in the blog). Check it out.

    1. Permitted scope of activities

    A Trust is a legal relationship that maybe created for any lawful purpose. It is generally created for educational, charitable, and socially beneficial activities. The Trust Deed should clearly define the responsibilities and obligations of Settlor and Trustee. 

    A Society can be formed only for the promotion of science, literature or fine arts,  literary, scientific, or grant of charitable assistance or for the diffusion or promotion of useful knowledge, political education, the foundation or maintenance of libraries or reading rooms for members or public. 

    Company is registered under Section 25 of the Companies Act, 1956. It can be defined as a limited company formed for the sole purpose of promoting commerce, science, art, religion, charity, or any other useful purpose. The Company needs to apply its profits if any or other income in promoting its objects and cannot distribute the payment of any dividend to its members. 

    1. Ownership 

    The Trustee is the legal owner of the Trust, members have the ownership of Society while the shareholders have the ownership of Company.

    1. Setting up Process 

    The setting up process for Public Trust takes between two to three months. The registration is required with Deputy Charity Commissioner of the relevant region. Minimum 2 trustees are required at the time of registration. For Private discretionary Trust, there is no process of registration. It can be created by the execution of Trust Deed.

    7 or more members subscribe their names to the Memorandum of Association of the Society and file the same. Certified copies of the same are submitted to the Registrar of Joint Stock Companies with the requisite fee.

    The Company needs registration under the Indian Companies Act. The incorporation process takes about three to four months. 

    1. Liability 

    The liability of Trust is unlimited whereas that of society and Company is limited.

    1. Overseas Borrowings 

    The overseas borrowings in the case of Trust, Society, and Company is not permissible as per ECB. 

    1. Compliance Requirements 

    Trust does not have any authorized guidelines to be followed for its day-to-day operations. Depending on whether the trust is private or public, there is some annual applicance requirement. 

    In the case of Society, list of the names, addresses, and occupations of the members of the managing committee of the society must be filed annually with the registrar of joint Stock Companies.  The deadline for the same is either on or before 14th days after the AGM or in the month of January. 

    Annual accounts and annual return of the Company must be filed annually with RoC. 

    1. Alteration of Objects 

    It is difficult to modify objects of the Trust and impossible in case of original settlers being not present or unwilling to do the same. 

    Objects in Society can be modified with the approval of 3/5ths of the members while in the case of Company it can be modified anytime subject to the approval of Central Government. 

    1. Management Control 

    The management control of a Trust is by trustees as appointed under the Trust Deed. 

    The Governing Council as elected by the society members has the control and management of a Society while in case of Company the control is in the hands of Directors as appointed by the shareholders. 

    1. Operational Control 

    Establishing operational control is the responsibility of Trustees in line with the Trust Deed. 

    Governing councils/directors / committee take charge of the operational control in Society whereas in Company the operational control is with the Directors in line with the MOA and AOA. 

    1. Members Participation 

    Trustees make decisions and have the final say whereas in case of Society and Company, members participation is as stated in the MOA. Further in case of Company, the rights of the shareholders are governed by the Companies Act.

    1. Termination 

    As per the rule, a Trust can be dissolved by the Settlor. 

    Any number not less than 3/5th of the members is required to dissolve a Society whereas in case of Company, winding up is a time consuming process. It can take anywhere between 10-12 months. 

    1. Funding (Foreign Contribution Regulation Act)

    If grants are received directly by the Trust, Society or Company from overseas, approval of Ministry of Home Affairs under Foreign Contribution Regulation Act is required. The entire process is time-consuming and can take anywhere between four to six months. So, the funding process is similar in all three cases. 

    The only exception is in case of a foreign trustee as the credibility of the foreign trustee needs to be established before the regulator. 

    1. Repatriation of funds 

    Profits or funds in case of Society and Trust can be utilized for the advancement of their objectives. While any form of repatriation is not possible in case of Company, the same is possible with a RBI approval in case of a Trust.

    1. Exchange Control/ FDI policy 

    For setting up an Indian Trust, the easier route is to not have a foreign trustee or beneficiary. In case it does, then the provisions of exchange control applies to the Trust.

    In the presence of a foreign trustee, the registration of Trust’s  immovable properties would require prior approval from RBI. As a non resident is not permitted to own immovable property in India, the same will not be possible.

    Further in the presence of a foreign beneficiary, prior RBI approval is required to make remittances in future and distribution on dissolution of the trust. Such an approval is extremely difficult.

    In case of a Company, the ownership of stock is governed by the FDI policy of the Government of India. According to the same, certain activities fall under the direct route, that is, no approval is required for them. For instance, educational research, tendering scholarships, publishing of books. Further, AICTE and University Grant Commission guidelines prohibit a Company from setting up a college, university or any educational institution

    1. Transfer of Ownership 

    Transfer of ownership is not permissible in case of Trust while it is permitted in Society with the appointment of new members and resigning of old members. The same should be approved by 3/5ths members resolution. 

    Company allows transfer of ownership by transfer of shares. 

    1. Tax Implications in hands of entity running the institution 

    Tax exemption can be sought u/s 10(23C) of IT Act after obtaining required approvals. It is similar in all three cases – Trust, Society and Company. 

    1. Tax Implications in hands of entity providing funds 

    In all three cases, the donor is eligible for a 50% deduction u/s 80G of the IT Act. If the provision of funds is in the nature of Share Capital to a Company, then no deduction is allowed.

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