Explained: Meaning of Section 25 company

What is this category of company — which is at the centre of the National Herald controversy?

Written by Udit Misra | Updated: December 11, 2015 4:56 am

A “Section 25” company is registered under Section 25 of the Companies Act, 1956. This section provides an alternative to those who want to promote charity without creating a Trust or a Society for the purpose. It allows the formation of a company, which will exist as a legal entity in its own right, separate from the person promoting it. The crucial bit, however, is that any company under this section must necessarily re-invest any and all income towards promoting the said object or charity. In essence, unlike a regular company, where owners and shareholders can make profits or receive dividends, no money gets out of a Section 25 company.

A Section 25 company is often preferred because it is easier to start — being exempt from statutory requirements of minimum paid-up capital. They are much easier to run than Trusts and Societies, as board meetings require a smaller quorum and requirements for calling such meetings are less rigid. It is easier to increase the number of directors, it is easier for people donating money to join or leave or transfer shares to others, and such a company is obliged to fulfill far less stringent book-keeping and auditing requirements as against a regular company. Lastly, a Section 25 company enjoys significant tax benefits. Depending on how it is registered under the Income-Tax Act, companies could benefit from income-tax exemptions, or from the provision wherein people donating money to these companies receive income deductions in their income-tax liability. Such companies are also exempt from stamp duty payments. Section 25 is preferred by several businessmen because they are conversant with the company structure, while benefits from several exemptions make it easy for philanthropy.

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