Law and You > Corporate Laws > Companies Act, 2013 > Small Company

Under the Companies Act, 2013, a Small Company is a specific type of private company that meets certain criteria based on its paid-up capital and turnover. The concept of a small company was introduced to reduce the compliance burden on small businesses and give them certain exemptions and relaxations from the more stringent provisions applicable to larger companies.

According to Section 2(20) of the Companies Act, 2013, a “Company means a company incorporated under this Act or under any previous company law.”

Small Companies are basically the private companies with limited amount of investment and having the privilege of special status under the Companies Act, 2013. The concept of “small company” has been introduced for the first time by the Companies Act, 2013. Most of the exemptions provided to a small company are same as that provided to a One Person Company (OPC), but not all the privileges available to OPC are available to a small company. 

Defining Small Company

According to Section 2(85) of the Companies Act, 2013 ‘small company’ means a company, other than a public company,—

(i) paid-up share capital of which does not exceed four crore rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; or

(ii) turnover of which as per its last profit and loss account does not exceed forty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

According to Section 2(85) of the Companies Act, 2013, a Small Company is defined as a company, other than a public company:

1. Paid-up Share Capital: Does not exceed ₹4 crore or such higher amount as may be prescribed, but not more than ₹10 crore.
2. Turnover: As per the profit and loss account for the immediately preceding financial year, does not exceed ₹40 crore or such higher amount as may be prescribed, but not more than ₹100 crore.

Both criteria (paid-up share capital and turnover) must be fulfilled to qualify as a small company. The limits on paid-up share capital and turnover can be revised by the Ministry of Corporate Affairs from time to time, but they cannot exceed the maximum caps of ₹10 crore (for capital) and ₹100 crore (for turnover)..

The status of a company as “Small Company” may change from year to year. With gradual growth of business, if a company cross any of the thresholds provided, either for paid-up capital or turnover, the company must give up the status of the small company and the benefits granted for such companies

Which Companies are not Small Companies?

The following companies do not fall under the purview of small company and the exemptions or reliefs to small companies are not available to them:

1. Public company
2. Holding company or a subsidiary company
3. A company registered under section 8 of Companies Act, 2013 or
4. A company or body corporate governed by any special Act;

Thus, the above companies even if they meet the criteria of capital and turnover, they will still fall outside the purview of small company and accordingly the benefits which are available to a small company cannot be applied to them.

Privileges and/or Exemptions Available to Small Company:

• The annual return of a small company can be signed by the company secretary alone, or where there is no company secretary, by a single director of the company.
• A small company may hold only two board meetings in a year instead of fulfilling the requirement of four meetings in a year like other companies.
• A small company need not include Cash Flow Statement as a part of its financial statements.
• Fees for filings and other formalities u/s. 403 of the Companies Act, 2013 is also comparatively lower for the small companies.
• A Small Company does not require to report in its Audit Report regarding Internal Financial controls and the operating effectiveness of the company.
• As per section 139(2) of the Companies Act, 2013 provisions regarding mandatory rotation of auditor/maximum term of auditor being 5 years in case of an individual and 10 years in case of a firm of auditors is not applicable to a small company.
• Small companies are exempted from the matters to be included in the Board’s report as per Rule 8 of Companies (Accounts) Rules, 2014.
• A small company is not required to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report.
• If a small company fails to comply with the provisions of section 92(5), section 117(2) or section 137(3), such company and officer in default of such company shall be liable to a penalty which shall not be more than one half of the penalty specified in such sections.
• Merger process between 2 or more small companies is to be approved on fast track basis.
• As per Rule 8 (12) of Companies (The Registration offices and fees) Rules, 2014 the e-forms filed by small companies are not required to be pre-certified by the Chartered Accountant or the Company Secretary or as the case may be the Cost Accountant, in whole-time practice.

Conclusion:

The classification of a Small Company under the Companies Act, 2013, helps reduce the compliance burden on smaller enterprises, enabling them to focus on growth while ensuring that they meet basic corporate governance requirements. This classification is an important part of the Act’s objective to encourage small business growth in India.

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