Two Routes, Not One
| Profit-not-distributing company | Association (NGO) | |
|---|---|---|
| Registered at | Office of Company Registrar | District Administration Office |
| Governed by | Companies Act 2063, Chapter 19 | Association Registration Act 2034 |
| Minimum people | 5 promoters, 5 members thereafter | Set by the Act and local practice |
| Share capital | None | None |
| Character | Corporate body, company-style governance and audit | Membership body, locally supervised |
| Typically suits | Foundations, professional bodies, institutions wanting durable corporate personality | Community organisations, membership groups, local NGOs |
Neither route is superior. The company route gives a durable corporate personality, institutional credibility with donors and partners, and company-standard accounting — at the cost of heavier governance. The association route is how most community NGOs in Nepal are constituted and is lighter to run, but is more closely tied to the district administration.
What Section 19 Actually Permits
Section 166(1) of the Companies Act 2063 allows a company not distributing profits to be incorporated to:
- develop and promote any profession or occupation;
- protect the collective rights and interests of those in a particular profession or field; or
- carry on any enterprise for a scientific, academic, social, benevolent or public utility or welfare objective,
on the condition that it does not distribute dividends.
Note the breadth: this is the vehicle for a foundation and equally for a professional association or an industry body. What it is not is a way to run ordinary commercial trading under a charitable label.
The Rules That Define the Form
Five promoters — and five members, continuing
Section 166(3) requires at least five promoters to incorporate, and the company must keep a minimum of five members afterwards. This is not merely a formation formality: an organisation that drifts below five members has a compliance problem, and small founder groups should plan the membership from the start rather than assembling five names for the filing.
Membership cannot be transferred
Section 166(4): membership shall not be transferable in any manner. There is no equity here to sell, assign or inherit. People sometimes approach a Section 19 company as though it were a company with unusual tax treatment; it is not. Nobody owns it in the sense that shareholders own a Pvt. Ltd.
Surplus stays inside
Section 167 prohibits distributing dividends, bonuses, or any other amount out of profits to members or employees. Surplus must go to augmenting the capital base or achieving the objectives.
The line that matters in practice: paying a fair salary for work actually done is fine. Paying a profit-linked bonus out of surplus is not. Organisations get into trouble at year end, when a good year tempts a distribution that looks like a bonus and reads, legally, like a dividend.
Name and branches need OCR approval
Section 166(5): using words such as “company”, “limited” or “private limited” in the name requires the prior approval of the Office. Section 166(6): expanding a branch also requires the Office’s approval. Growth is a filing event, not just an operational decision.
Who may incorporate
Section 166(2): any person, the trustee of a public trust, or another corporate body may apply — so an existing institution can establish one, which matters for organisations setting up a foundation arm.
Foreign Funding: SWC Affiliation
Social Welfare Council affiliation is required only where the organisation receives foreign funding. A domestically funded non-profit does not need it.
If foreign grants are part of the plan, arrange SWC affiliation and project approval early. It governs the funds rather than the entity, and organisations that secure a donor first and discover the affiliation requirement second end up holding money they cannot yet properly receive.
Tax Exemption Is Applied For, Not Automatic
This is the most common and most costly misunderstanding in the sector. Not distributing profits does not make you tax exempt. Exemption is applied for at the Inland Revenue Department after the entity has its PAN, and until granted the organisation is treated like any other taxpayer.
Filing and audit obligations continue regardless of exempt status. Budget for an accountant from year one: a non-profit that has not filed is in exactly the same position as a company that has not filed.
Three assumptions to discard before you start. A non-profit is not automatically tax exempt. It is not owned by its founders and the membership cannot be sold or passed on. And it cannot pay out surplus, however it is labelled. If any of those three is central to your plan, a non-profit is the wrong vehicle and it is far cheaper to learn that now than after incorporation.
How to Choose
Choose the Section 19 company if you want a durable institution with corporate personality, expect to deal with institutional donors, partners or government at scale, or are establishing a foundation from an existing organisation.
Choose the DAO association if you are a community or membership organisation, want lighter running governance, and expect to work locally.
Either way, if foreign funding is involved, SWC affiliation sits on top, and tax exemption is a separate application in both cases.
Steps
Before filing
- Pick the route — company or association.
- Assemble at least five promoters for the company route, and plan ongoing membership.
- Draft objectives that genuinely fit s.166(1) — they will be read.
- Get name approval from the OCR if the name uses “company” or “limited”.
Registering
- File at the OCR (company) or the DAO (association).
- Obtain the PAN from the IRD.
- Apply separately for tax exemption.
- Arrange SWC affiliation if foreign funds are expected.
Running it
- Keep membership at five or more.
- No distributions of surplus, in any form or name.
- Get OCR approval before opening branches.
- File accounts and audit on time, exempt or not.
Not sure whether you want a company or an association? It depends on who funds you and how you intend to be governed — and it is much cheaper to decide before filing than after. Tell us what you are building and we will tell you which route fits.
Which route fits us?“UdhamSathi helped me build my company.” — UdhamSathi client
Frequently Asked Questions
How many people are needed?
Five. Section 166(3) requires five promoters to incorporate and a minimum of five members afterwards. Membership is non-transferable (s.166(4)).
What is the difference between an NGO and a non-profit company?
A non-profit company is incorporated at the OCR under Chapter 19 with company-style governance; an NGO/association is registered at the DAO under the Association Registration Act 2034 and is lighter but locally supervised. Both have no share capital.
Can it pay staff or distribute surplus?
Salaries for work done, yes. Dividends, bonuses or any amount out of profits, no (s.167). Surplus goes to the capital base or the objectives.
Is SWC affiliation required?
Only for foreign funding. Domestically funded non-profits do not need it — but arrange it before accepting foreign grants, not after.
Is it automatically tax exempt?
No. Exemption is applied for at the IRD after PAN. Filing and audit obligations continue either way.
About this guide. Provisions are cited to Sections 166 and 167 of the Companies Act 2063. The association route runs under the Association Registration Act 2034 and is administered by District Administration Offices, whose practice varies; SWC and IRD requirements change with policy. Confirm current requirements before filing — we do that as part of any registration we handle.
Setting Up a Foundation or NGO?
We help you choose between the Section 19 company and the association route, then handle the registration, PAN and tax-exemption application.
Call: 9765057249 WhatsApp: 9700533219