All you need to know about Small Companies under the Companies Act, 2013

Small Companies under the Companies Act, 2013

The concept of small company was introduced under the Companies Act of 2013 with a view to provide advantages for small businesses functioning as a private limited company. As you would be aware that small businesses form the backbone of the economy, and the procedure for starting and managing small businesses should be simple to boost employment and economy. Hence, the classification of small company under Companies Act goes a long way in promoting small business in India. Let’s now look at Small Companies in detail and also the latest amendments made in Union Budget 2021 concerning these companies.

Older Definition of Small Companies

Earlier, the definition of this company under the Companies Act 2013 meant the company which satisfied the following conditions:

  • Such company has a paid-up share capital of not more than 50 lakh or such higher amount as prescribed which will not be more than 10 crores;
  • Such company has an annual turnover of not more than 2 crore or such higher amount as prescribed, which will not be more than 100 crore.

New definition of Small Companies

Now, as per the amendments made, the definition of this company other than a public company that fulfils the following conditions:

  • Paid-up share capital of which is not more than 2 crore rupees or such higher amount as prescribed which will not be more than 10 crore; and
  • Turnover of which according to the profit and loss account for the immediately preceding financial year is not more than 20 crore or such higher amount as prescribed which will not be more than 100 crore rupees.
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It may be noted that these changes was proposed by the Finance minister while presenting the union budget 2021, where the paid-up capital and turnover was increased to 2 crore and 20 crore, respectively. The changes take effect from 1st day of April 2021.

Exceptions in case of Small companies

A company is not a small company in case-

  • It is a public company;
  • It is a holding company;
  • It is a subsidiary of another company;
  • It is a company registered under Section 8 of Companies Act 2013 or; and
  • It is a company or a body corporate governed by any Special Act.

What are the main features of a Small Company?

The main features of this company are as follows:

Main features of a Small Company
  • It’s a private company;
  • It has a limited area of operation;
  • It has a fewer number of employees working;
  • It holds a limited amount of investment;
  • It has a separate legal entity from its owners;
  • The status of a small company might change from one year to another as capital and turnover changes; and
  • There are certain benefits that are provided to these type of companies under the Companies Act 2013[1].

Advantages to Small Companies

A private limited company that can be classified as a small company has a host of benefits provided under the Companies Act and lesser compliance formalities. Let’s discuss some of the advantages.

  • Filing annual return

The annual return of the private limited company classified as a small company may be signed by a CS (Company Secretary) or by a director of private limited company. The annual return of private limited company that is not classified as a small company has to be signed by a director and a company secretary.

  • Board meeting
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As far as board meeting is concerned, small business are required to conduct just two board meetings in a financial year. When it comes to other companies, they are required to conduct four board meetings in a financial year.

  • Cash Flow Statement

A private limited company that is classified as a small company is not required to prepare a cash flow statement as part of the financial statement, whereas other companies require preparing the same.

They are also not required to report internal financial controls and the operating efficiency of the company in their audit report.

  • Penalties

These companies also have lesser penalties as compared to every other company.

Strategic importance of small companies in the economy

Such companies have a poignant role to play in supporting the economy. They act as trouble-shooters for the society they are based out of, as they tackle small scale or local issues. These companies contribute taxes and offer employment as well to the region they operate in. These companies promote entrepreneurial spirit and often aid government to supply necessities to the community. 

It can target issues of the consumers, which the large companies may fail in. With their small size, they quickly adapt to the changing environment as well as to the changing habits of consumers.

They often handle certain business functions of larger firms and thereby contribute to their smooth functioning. Large firms outsource some part of their work to smaller companies, and as a result, they act as a catalyst for the growth and development of the community. Therefore the government has provided certain benefits and exemptions to this type of companies.

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The relaxations and benefits attached to small companies make them an exciting proposition for entrepreneurs. Some of these companies also feature among the fastest growing companies in India.

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