Starting an education startup? Which one to choose: a Society, Section 8, Trust, or Private Limited?

Starting an education startup is a huge journey and it is not for the faint hearted. To keep your startup legal, there are a number of different structures you can choose from; And there comes the big question, which entity type should you choose for your education startup? Should you choose any one of the Non-Government Organization or a Private Company?

Here in this article, we will be discussing about various entity types for an education startup and also what is the difference between a Society, a Section 8, a Trust or a Private Limited company?

Trust, Societies and Section 8 Companies are referred as non-profit organization, these organizations are formed to promote social development, social welfare and other charitable purpose. Which means profit made from these organization cannot be divided amongst the promoters.

In the other hand Private limited company is formed to make profit out of a business. Private limited company promote or work towards the shareholder’s interest.

Let’s understand in detail about each organization structure.

When to consider forming a society?

  • If you want an elected body to manage your organization, this is the best option.
  • A society allows its members to easily leave if they do not want to be bound permanently to it.
  • If your decision is based on which of the three is the most straightforward, you should opt for forming a society. In comparison to booth trusts and Section 8 companies, it is easier to dissolve a society.
  • A society can receive public funds as a donation and use it for its best interest.

When To Consider Forming a Trust?

  • If the business is run by more than one family member.
  • If you want the trustee to serve for the rest of his or her life without having to be re-elected.
  • If required privacy in terms of activity as well as flexibility in the division of benefits.
  • A trust can receive public funds as a donation and use it for its best interest.

When to Consider Section 8 Company?

  • If the goal is to carry out a wide variety of activities.
  • Because it is a government-approved establishment, it must gain trust and credibility.
  • To achieve a company's legal structure without requiring a large amount of capital.
  • A Section 8 company can receive public funds as a donation and use it for its best interest.

When to consider Private Limited Company?

  • If the goal is to carry out operations for making profit
  • If want to raise funds in exchange of equity
  • A private limited company cannot receive public funds as a donation

Difference Between Society, Trust, Section 8 and Private limited company

The differences between the four different types of organization will be highlighted in the table below.

ParticularsTrustSocietySection 8 CompanyPrivate Limited
Company
Governing LawThe Indian Trust Act, 1882The Societies Registration Act, 1860The Companies Act, 2013The Companies Act, 2013
Legal ExistenceNot a separate legal entity, so it cannot sue and be suedA separate legal entity, which can sue and be suedA separate legal entity, which can sue and be suedA separate legal entity, which can sue and be sued
Charter DocumentTrust DeedBy-LawsMemorandum and Article of AssociationMemorandum and Article of Association
RemunerationReasonable remuneration can be drawn by the trustees, only if they are rendering any services to the trustReasonable remuneration can be drawn by the trustees, only if they are rendering any services to the societyRemuneration can be drawn by the executive directors subject to provisions of the Companies Act, 2013Remuneration can be drawn by the executive directors subject to provisions of the Companies Act, 2013
Contracts or agreement with related parties or parties who are interested in the entityThere is no restrictionThere is no restrictionFew restrictions of related party transactionsFew restrictions of related party transactions
Conducting meetings and maintenance of secretarial recordsNot mandatoryGeneral body meeting has to be conducted once in a year and for obtaining any other approvals from the members. Records of such meetings need to be maintainedBoard meetings and general meetings are required to be conducted at appropriate time and the records of the same should be properly maintainedBoard meetings and general meetings are required to be conducted at appropriate time and the records of the same should be properly maintained
Maintenance of books of accountsRequired to maintain books of accountsRequired to maintain books of accountsRequired to maintain books of accountsRequired to maintain books of accounts
Audit of accountsMandatory only if the income of the trust exceed the prescribed limitMandatory only if the income of the society exceed the prescribed limitMandatory from first financial year onlyMandatory from first financial year only
Annual filing of financial statement with concerned authoritiesNot requiredRequired to be filedRequired to be filedRequired to be filed
Filing income tax returns annuallyMandatoryMandatoryMandatoryMandatory
GST RegistrationMandatory only if the turnover exceed the prescribed limitMandatory only if the turnover exceed the prescribed limitMandatory only if the turnover exceed the prescribed limitMandatory only if the turnover exceed the prescribed limit
Creditworthiness of organizationLessor creditworthiness due to flexible laws and lesser compliance requirementLessor creditworthiness due to flexible laws and lesser compliance requirementHigher creditworthiness due to stringent compliances & disclosures under various laws.Higher creditworthiness due to stringent compliances & disclosures under various laws.
Annual cost of complianceLesserLesserHigher because of mandatory compliance requirementsHigher because of mandatory compliance requirements
StatusWorks a Non-Government organization, wherein grants and donations can be received.Works a Non- Government organization, wherein grants and donations can be received.Works a Non-Government organization, wherein grants and donations can be received.Works purely as private organization, wherein the investment is made by members and profit is enjoyed. However, there are restrictions to receive grants and donations.
Advantages? Low cost of operation
? The structure provides more flexibility in operating.
? Income-tax benefits can be availed.
? Low cost of operation
? The structure provides more flexibility in operating.
? Income-tax benefits can be availed.
? Liability of shareholders is limited to the amount paid up by them.
? Tax exemptions may be availed.
? Highest creditworthiness
? Most recognized form of entity for further registrations and accreditation.
? Preferred by business counterparts and vendors.
? Liability of shareholders is limited to the amount paid up by them.
? Tax exemptions may be availed.
? Highest creditworthiness
? Most recognized form of entity for further registrations and accreditation.
? Preferred by business counterparts and vendors.
Disadvantages? Lesser creditworthiness.
? All trustees need to be personally present at the time of registration of trust and even at the time of registering any changes in the trust deed.
? Authorities for all other registrations, business counterparts or vendors may not prefer.
? Lesser creditworthiness.
? Authorities for all other registrations, business counterparts or vendors may not prefer.
? Require state-wise registration.
? Profit cannot be used for personal use.
? Cannot alter chartered documents without approval of Central Govt.
? Profit can only be used for the objectives of the company.
? Dividend cannot be declared.
? Cost of compliance is higher.
? Financials can be viewed by anyone, as it will be available in public domain.
? Cost of compliance is higher.
? Financials can be viewed by anyone, as it will be available in public domain.

So, the million-dollar question. Every startup is different, and no two startup journeys are the same. You need to understand your long-term goals and how you’re going to achieve them. In the same way, the best option for you will depend on your circumstances. If you’re a startup looking for help with your business registration, then we’d love to help. Please get in touch with us at enquire@wazzeer.com or click here.