Between NGOs and Trusts

Non-Governmental Organizations (NGOs) and Trusts are both popular forms of entities that serve social, charitable, and community purposes. While they share some similarities, they differ significantly in their structure, operations, and legal requirements. This comprehensive guide explores the key differences between NGOs and Trusts, detailing their definitions, purposes, formation processes, governance, and regulatory compliance. Additionally, we answer ten frequently asked questions to provide a thorough understanding of both entities.

Both NGOs and Trusts are crucial in addressing societal needs and contributing to community welfare. However, their legal structures and operational mechanisms are distinct, affecting how they function and achieve their objectives.

A Non-Governmental Organization (NGO) is a legally constituted organization created by private individuals or groups without government participation. NGOs can operate at local, national, or international levels and focus on various issues, including education, health, human rights, and environmental conservation. They can be structured as societies, trusts, or Section 8 companies under the Companies Act, 2013.

A Trust is a fiduciary arrangement in which one party, known as the trustor or settlor, transfers assets to another party, the trustee, for the benefit of a third party, the beneficiary. Trusts are established to manage and protect assets, and they can be private (benefitting specific individuals) or public (serving charitable purposes). Trusts in India are governed by the Indian Trusts Act, 1882, and public charitable trusts are regulated by state laws.

1. Legal Structure:
   • NGOs: NGOs can be formed as societies, trusts, or Section 8 companies. Societies are governed by the Societies Registration Act, 1860, while Section 8 companies are regulated under the Companies Act, 2013.
   • Trusts: Trusts are governed by the Indian Trusts Act, 1882 (for private trusts) and respective state laws (for public charitable trusts).
2. Formation Process:
   • NGOs: Societies require a minimum of seven members to register and must draft a memorandum of association and bylaws. Section 8 companies need at least two directors and members and must draft a memorandum of association and articles of association.
   • Trusts: Trusts are formed by drafting a trust deed, which outlines the trust’s purpose, beneficiaries, and trustees. Trusts can be created by a single individual or a group.
3. Governing Body:
   • NGOs: Societies are managed by a governing body or executive committee elected by the members. Section 8 companies are managed by a board of directors.
   • Trusts: Trusts are managed by trustees appointed as per the trust deed. The settlor usually appoints the initial trustees.
4. Registration:
   • NGOs: Societies must register with the Registrar of Societies, while Section 8 companies must register with the Registrar of Companies.
   • Trusts: Trusts are registered with the Sub-Registrar of Assurances in the respective state where the trust is created.
5. Operational Scope:
   • NGOs: NGOs can operate locally, nationally, or internationally and can engage in a wide range of activities, including advocacy, service delivery, and research.
   • Trusts: Trusts primarily focus on managing and distributing assets for charitable purposes, although they can also engage in various philanthropic activities.
6. Tax Exemptions:
   • NGOs: Both societies and Section 8 companies can apply for tax exemptions under Section 12A and 80G of the Income Tax Act, 1961.
   • Trusts: Public charitable trusts can also apply for tax exemptions under Section 12A and 80G of the Income Tax Act, 1961.
7. Compliance and Reporting:
   • NGOs: Societies must file annual returns and reports with the Registrar of Societies. Section 8 companies are required to file annual financial statements and returns with the Registrar of Companies.
   • Trusts: Trusts must maintain regular accounts and file annual returns with the relevant state authority.

Formation of a Society (NGO)

1. Choose a Name: Select a unique name for the society that complies with the Societies Registration Act, 1860.
2. Draft Memorandum of Association (MoA): Outline the society’s objectives, registered office, and details of founding members.
3. Draft Bylaws: Define the rules and regulations governing the society’s operations, membership, meetings, and dissolution.
4. Submit Documents: Submit the MoA, bylaws, and requisite fees to the Registrar of Societies in the respective state.
5. Obtain Registration Certificate: Upon approval, the Registrar issues a Certificate of Registration, making the society a legal entity.

Formation of a Section 8 Company (NGO)

1. Choose a Name: Reserve a unique name for the company through the Ministry of Corporate Affairs (MCA) portal.
2. Obtain Digital Signatures and DIN: Acquire Digital Signature Certificates (DSCs) and Director Identification Numbers (DINs) for the directors.
3. Draft MoA and AoA: Prepare the Memorandum of Association (MoA) and Articles of Association (AoA) outlining the company’s objectives and operational rules.
4. Apply for Incorporation: Submit the incorporation application, including the MoA, AoA, and requisite fees, through the MCA portal.
5. Obtain Certificate of Incorporation: Upon approval, the Registrar of Companies issues the Certificate of Incorporation, granting legal status to the company.

Formation of a Trust

1. Draft Trust Deed: Prepare a trust deed outlining the trust’s objectives, beneficiaries, trustees, and the management framework.
2. Register Trust Deed: Submit the trust deed, along with the requisite fees, to the Sub-Registrar of Assurances in the respective state.
3. Obtain Trust Registration Certificate: Upon successful registration, the trust receives a Trust Registration Certificate, making it a legal entity.

Operational and Governance Differences

1. Decision-Making:
   • NGOs (Societies and Section 8 Companies): Decisions are typically made by the governing body or board of directors through regular meetings and resolutions.
   • Trusts: Trustees make decisions as per the provisions of the trust deed. Meetings may not be as formalized as those in societies or companies.
2. Membership:
   • NGOs (Societies): Membership is open to individuals who meet the eligibility criteria set by the society. Members can vote and participate in decision-making.
   • NGOs (Section 8 Companies): Membership is limited to shareholders (members) who have subscribed to the company’s shares.
   • Trusts: Beneficiaries are not considered members and do not have voting rights. Trustees manage the trust for the beneficiaries’ benefit.
3. Fundraising:
   • NGOs: Can raise funds through donations, grants, memberships, and fundraising events.
   • Trusts: Can raise funds through donations, grants, and income from trust assets.
4. Dissolution:
   • NGOs (Societies): Dissolution is governed by the provisions of the Societies Registration Act, requiring approval from the majority of members.
   • NGOs (Section 8 Companies): Dissolution is governed by the Companies Act, requiring approval from shareholders and regulatory authorities.
   • Trusts: Dissolution is governed by the terms of the trust deed and relevant state laws, often requiring court approval.

1. Annual General Meetings (AGMs):
   • NGOs (Societies and Section 8 Companies): Required to hold AGMs to discuss annual reports, financial statements, and future plans.
   • Trusts: Not mandatory to hold AGMs, but trustees must meet regularly to review the trust’s activities and financial status.
2. Financial Audits:
   • NGOs: Must conduct annual financial audits and submit reports to the relevant authorities.
   • Trusts: Must maintain accurate financial records and may be required to conduct audits depending on state regulations.
3. Statutory Filings:
   • NGOs (Societies and Section 8 Companies): Must file annual returns and financial statements with the Registrar of Societies or Registrar of Companies.
   • Trusts: Must file annual returns and financial statements with the relevant state authority.

1. Save the Children (NGO): A global NGO registered as a Section 8 company in India, focusing on child rights and welfare. The organization successfully leverages its structured governance and compliance framework to secure significant funding and achieve its mission.
2. The Akshaya Patra Foundation (Trust): A public charitable trust in India that runs the world’s largest school meal program. The trust’s well-defined management structure and compliance with regulatory requirements have enabled it to expand its reach and impact.

Conclusion

Understanding the differences between NGOs and Trusts is crucial for individuals and organizations looking to establish entities for social, charitable, or community purposes. While both serve important roles in society, their legal structures, formation processes, governance, and compliance requirements vary significantly. This comprehensive guide provides the necessary information to help you make an informed decision about the most suitable form for your charitable endeavors.

1. What is an NGO? An NGO (Non-Governmental Organization) is a legally constituted entity created by private individuals or groups without government participation, focusing on various social, charitable, or community activities.
2. What is a Trust? A Trust is a fiduciary arrangement where one party (the trustor) transfers assets to another party (the trustee) for the benefit of a third party (the beneficiary).
3. What is the main difference between an NGO and a Trust? The main difference lies in their legal structures and governance. NGOs can be societies, trusts, or Section 8 companies, while Trusts are fiduciary arrangements governed by trust laws.
4. How is an NGO formed? NGOs can be formed as societies under the Societies Registration Act, 1860, or as Section 8 companies under the Companies Act, 2013. The formation process involves drafting governing documents and registering with the appropriate authority.
5. How is a Trust formed? A Trust is formed by drafting a trust deed and registering it with the Sub-Registrar of Assurances in the respective state.
6. Who manages an NGO? NGOs are managed by a governing body or executive committee (for societies) or a board of directors (for Section 8 companies).
7. Who manages a Trust? Trusts are managed by trustees appointed as per the trust deed.
8. Can NGOs and Trusts apply for tax exemptions? Yes, both NGOs and public charitable Trusts can apply for tax exemptions under Sections 12A and 80G of the Income Tax Act, 1961.
9. Are NGOs and Trusts required to file annual returns? Yes, NGOs (societies and Section 8 companies) must file annual returns and financial statements with the relevant authorities. Trusts must also file annual returns as per state regulations.
10. Which entity is better for charitable activities, an NGO or a Trust? The choice depends on the specific objectives, governance preferences, and regulatory requirements. NGOs offer more flexibility in activities and operations, while Trusts provide a focused approach to asset management and charitable purposes.