A Non-Profit Distributing Company refers to a type of company that is established not for the purpose of distributing profits or dividendsto its members, shareholders, or directors, but rather to promote public interest objectives such as social welfare, education, culture, religion, science, literature, or environmental protection.
In Nepal, such companies are governed by Section 166 of the Companies Act, 2063
To comply with any legal provision, it is essential to first understand the legislative intent behind that law. According to Section 166(1) of the Companies Act, it is stated that “Notwithstanding anything contained elsewhere in this Act, a company may be incorporated without the condition of distributing profits for the purpose of promoting or developing any profession or business, protecting the collective rights and interests of persons engaged in any specific profession or business, or achieving any educational, academic, social, philanthropic, public utility, or welfare objectives.”
This provision clarifies that a non-profit distributing company may be established and operated with or without the objective of earning profit. In other words, such a company can be registered even without engaging in any form of economic or income-generating activity. It can be formed solely for the promotion and development of a profession or business, the protection of the collective rights and interests of persons involved in a particular profession or sector, or for achieving educational, academic, social, philanthropic, public utility, or welfare goals.
Moreover, if the company happens to earn any profit while pursuing these objectives, such profit cannot be distributed as dividends to its members or stakeholders. The profit must instead be used to further the objectives of the company in accordance with the non-profit principles set out in the law.
Legal provisions related to Non-profit distributing compan
Purpose and Incorporation
Non-Profit Distributing Companies are established primarily to serve public interest objectives, such as education, social welfare, arts, culture, or the development and protection of specific professions. While they may engage in income-generating activities, their key feature is that profits cannot be distributed to members or directors. Instead, all income must be reinvested to further the company’s objectives.
Promoters and Membership
An NPDC must have at least five promoters at the time of registration and maintain a minimum of five members afterward. Membership is non-transferable and ends automatically if a member dies, dissolves, or merges with another entity. This ensures stability and continuity in governance.
Approval and Naming
Prior approval from the Office of the Company Registrar is required for incorporation, changing the company’s objectives, and establishing branch offices. However, a Non-Profit Distributing Company is prohibited from using the words “Company,” “Limited,” or “Private Limited” in its name under any circumstance, to prevent confusion and misuse of its legal status.
Financial Structure and Liability
Unlike traditional companies, NPDCs are not required to have share capital. They can raise funds through membership fees and lawful donations. Members are generally not personally liable for the company’s debts, except when they have explicitly accepted such liability in writing, and only up to a specified limit.
Profit Use and Restrictions
NPDCs are prohibited from distributing profits, bonuses, or dividends. Any surplus income must be used to expand the company’s capital or fulfill its stated objectives, maintaining the company’s non-profit character.
Governance and Election of Directors
Directors are elected by the members themselves, following the principle of “one member, one vote.” The number of directors is defined in the Articles of Association. This democratic governance ensures accountability and representation of members’ interests.
Expenses and Remuneration Limits
The Office of the Company Registrar sets limits on salaries, meeting allowances, and operational expenses, considering the company’s financial condition. This prevents excessive spending on administration and keeps funds focused on the company’s mission.
Dissolution and Asset Distribution
When dissolved or deregistered, any remaining assets after settling debts must be dealt with according to the Articles of Association. If no provision exists, assets must be transferred to the Government of Nepal or another NPDC, and cannot be given to promoters or their relatives.
Violations and Enforcement
If an NPDC violates legal provisions, the Company Registrar may cancel its registration, but only after giving the company an opportunity to respond. Appeals against cancellation can be filed in court within 35 days. Upon cancellation, a liquidator and auditor are appointed to complete liquidation within a specified timeframe, ensuring orderly closure.
Registration process of Non-Profit Distributing Company
The process of registration of Non- Profit Distributing Company are given below:
Required Documents for Registration of a Non-Profit Distributing Company
To register a Non-Profit Distributing Company under the Companies Act, 2063, the following documents must be submitted to the Office of the Company Registrar:
- Duly filled company registration application form
– As prescribed by the Registrar’s Office. - Proposed company name
– Including at least two alternative name options for approval. - Memorandum of Association (MOA)
– Stating the company’s objectives, activities, and non-profit nature. - Articles of Association (AOA)
– Outlining internal governance, rules, and management structure. - Details of promoters/founding members
– Full names, addresses, and roles within the company. - Citizenship certificates
– For all Nepali promoters. - Passport copies
– For any foreign promoters or directors (if applicable). - Consent letters from proposed directors
– Expressing their willingness to serve as directors of the company. - Proof of registered office address
– Such as house rent agreement, utility bill, or land ownership certificate. - Bank voucher for paid-up capital deposit (if applicable)
– Though capital is not mandatory, if any fund is deposited, proof is needed. - Power of Attorney (if applicable)
– If the application is submitted through an authorized representative. - Other supporting documents
– As may be specifically requested by the Company Registrar based on the nature of the company.
Difference Between Profit-Distributing and Non-Profit Distributing Companies:
| Basis of Difference | Profit-Distributing Company | Non-Profit Distributing Company (NPDC) |
|---|---|---|
| Objective | Established to earn and distribute profit among shareholders or owners. | Established to promote public interest, social welfare, or a specific profession—without distributing profit. |
| Distribution of Profit | Can distribute profits as dividends, bonuses, or other benefits to shareholders or members. | Prohibited from distributing any profit, bonus, or income to members or employees. |
| Use of Profit | Profits may be shared or reinvested as per company policy. | All profits must be used to further the company’s objectives or increase its capital. |
| Share Capital | Mandatory; capital is raised by issuing shares to investors. | No requirement of share capital; can collect membership fees and donations. |
| Member Liability | Liability is generally limited to the unpaid value of shares. | Members have no liability unless they voluntarily accept it in writing, and only up to that amount. |
| Naming of Company | Can use terms like “Limited,” “Private Limited,” or “Company.” | Cannot use terms like “Limited,” “Private Limited,” or “Company” in its name. |
| Governance Structure | Appoints directors, may require independent directors in public companies. | Also governed by directors elected by members; independent director appointment is not clearly defined. |
| Regulatory Oversight | Monitored by the Office of the Company Registrar and other relevant authorities. | Also monitored by the Company Registrar, but often lacks sector-specific regulatory clarity. |
| Tax Exemption | Not eligible for tax exemption unless specified by law. | Can apply for tax exemption under Income Tax Act, 2058, but not automatically granted. |
| Merger with Other Companies | Can merge with other profit-distributing companies. | Cannot merge with profit-distributing companies. |
Exisiting Ambiguities
Despite having a dedicated legal framework under the Companies Act, 2063, the regulation of Non-Profit Distributing Companies in Nepal still suffers from several ambiguities that create confusion in practice. A major issue lies in the overlapping roles of the Companies Act and the Social Welfare Act, leading to uncertainty over whether NPDCs also need to register with the Social Welfare Council when they carry out social activities or receive foreign aid. Unlike NGOs, NPDCs do not receive automatic tax exemptions and must apply separately to the tax office, with no guarantee of approval creating financial and legal uncertainty. Additionally, while NPDCs can raise funds through membership fees and donations, the law lacks detailed guidelines on how such funds should be managed or audited, raising concerns about accountability. Weak monitoring from the Company Registrar’s Office, due to the absence of regular inspections or compliance systems, further contributes to the risk of non-compliance. Though profit distribution is legally prohibited, loopholes remain that allow indirect personal benefit through inflated salaries or insider dealings. Delays in obtaining mandatory approval such as for changing objectives or opening branch offices also frustrate the effective functioning of NPDCs. Lastly, the process for asset distribution during liquidation is not clearly defined, making room for disputes or misuse. These ambiguities suggest an urgent need for clearer policies, financial oversight, and harmonization with other regulatory bodies to ensure that NPDCs can function transparently and in line with their non-profit purpose.
Conclusions
Non-Profit Distributing Companies offer a legal pathway to serve public interest without profit motives, but their effective operation is hindered by legal ambiguities and weak implementation. Overlapping laws, unclear tax rules, and lack of proper oversight have created confusion and limited their growth. To ensure these companies function transparently and purposefully, clearer regulations, streamlined procedures, and stronger monitoring are essential. Strengthening the framework will boost trust and allow NPDCs to better fulfill their social and public missions.