Firstly, we need to understand what is acharitable entity.
A charitable entity is an entity whose activities falls under the “Charitable purpose” as defined under Section 2(15) of the Income Tax Act. Activities included under section 2(15) are: –
(a) relief of the poor, (b) education, (c) Yoga (d) medical relief, (e) preservation of environment (including water sheds, forests and wild life) f) preservation of monuments or places or objects of artistic or historic interest and (g) advancement of any other object of public utility
Benefits of a Charitable Entity:
Tax Benefits: Charitable entities are eligible for tax exemptions under certain conditions, depending on the purpose and activities of the trust. For example, charitable entity created for charitable purposes are eligible for tax exemptions under section 11 of the Income Tax Act, of 1961.
Public Support: Charitable entities often attract public support and goodwill as they are perceived to be working for the betterment of society. This can lead to increased donations, grants, and support from individuals, corporations, and government agencies.
Access to Funding: Charitable entities have access to various sources of funding, including government grants, philanthropic donations, and corporate sponsorships, which can aid in carrying out their charitable activities.
Mission-Driven Focus: As a charitable entity, the organization’s primary focus is on fulfilling its charitable objectives rather than solely maximizing profits. This mission-driven approach attract employees and volunteers who are passionate about the cause.
Disadvantages of a Charitable Entity:
Reporting and Compliance: Charitable entities are required to meet specific reporting and compliance requirements to maintain their charitable status like renew their 12A registration certificate in every 5 years. Failure to do so could result in the loss of tax benefits and even legal consequences.
Expenses allowed on payment basis only: Any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it which are allowed on payment basis only.
Restricted Activities: Charitable entities are usually subject to legal restrictions on the types of activities they can engage in. They must demonstrate that their activities align with their stated charitable purpose, which may limit their scope of operations.
Governance and Accountability: Charitable entities must adhere to strict governance and accountability standards. They may be required to have a board of directors, maintain transparency in financial matters, and follow specific guidelines to ensure proper use of funds.
Limited Profit Distribution: Unlike commercial entities where profits can be distributed to shareholders, charitable entities are generally prohibited from distributing profits to individuals. Any surplus generated must be reinvested into furthering the charitable purpose.
