Lets look around what is a Small Company and what advantages a Small Company have as per Companies Act 2013
The Companies Act, 2013 (‘Act’) introduced the concept of small companies to provide advantages for small businesses operating as private limited companies. Small companies have less annual revenue compared to regular-sized companies.
Small companies do not have any separate procedure to obtain registration under the Act. It is registered as a private limited company. But the Act differentiates a private company as a small company based on its less amount of investment and turnover.
New Definition of a Small Company
The Finance Minister proposed a revised definition of a small company while presenting the Union Budget 2021. The revised definition came into effect on 1 April 2021. The MCA further amended the definition of a small company on 15 September 2022.
The purpose behind the revised definition was to provide ease of doing business and reduce the compliance burden for many companies. Accordingly, the Ministry of Corporate Affairs (MCA) notified the Companies (Specification of Definitions Details) Amendment Rules, 2022, to amend the old definition of a small company.
The new definition is effective from 15 September 2022. The new amended definition of a small company is provided under Section 2(85) of the Companies Act, 2013.
The Act defines a small company as a company that is not a public company and has:
- A paid-up share capital equal to or below Rs.4 crore or such a higher amount specified not exceeding more than Rs.10 crores.
- A turnover equal to or below Rs.40 crore or such a higher amount specified not exceeding more than Rs.100 crore.
However, the concept of small companies does not apply to the following companies:
- A holding or a subsidiary company. A company registered under section 8.
- A body corporate or company governed by any special act.
Most startups in India are classified as small companies as they will not have a paid-up capital of more than Rs.10 crores and an annual sales turnover of more than Rs.20 crores.
Benefits for a Small Company Under the Companies Act, 2013
Board Meetings: Small companies must have a maximum of two meetings in a financial year. Whereas a private limited company that is not considered a small company must conduct four board meetings in a financial year.
Annual Return: The annual return filing of a small company can be signed by either a Company Secretary (CS) or a company director. The annual return filing of a private limited company other than a small company must be signed by both a director and a CS.
Cash Flow Statement: A small company need not maintain a cash flow statement as a part of its financial statement. Whereas a private limited company not coming under the category of a small company must mandatorily prepare a cash flow statement as a part of its financial statement.
Auditors Rotation: A small company does not require to rotate its auditors. However, a private limited company not classified as a small company must rotate its auditors every five to ten years as provided under the Act.
Fees and Charges: In the case of a Small Company, the Act prescribes lesser penalties compared to other private or public companies. It also provides less fees for filing forms with the ROC compared to the fees of other companies.
Abridged Forms: Small companies need not file directors’ report. They need to file the abridged directors’ report. An abridged directors’ report is not as vast as the directors’ report, and thus, they can omit many clauses that are present in the directors’ report. Similarly, small companies must file their annual returns in Form MGT-7A. Form MGT-7A is the abridged version of Form MGT-7, which is filed by medium and large companies.
A small company is also not required to prepare a report on the Annual General Meeting. However, the status of a small company can change every year depending upon its paid-up capital and turnover limits. When a company crosses the thresholds provided in the new definition (either for paid-up capital or turnover), the benefits available during a financial year will be removed in the following year. The small company will lose its status as a small company and be treated as a private limited company not classified as a small company.
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