Companies that are small in size and operations are provided with some exemptions and privileges when it comes to fulfilling the requirements of various statutes. Such companies are categorized as “Small Companies”. In this blog, we have discussed the definition of a Small Company.
What is a Small Company?
The Companies Act 2013 created the concept of small companies to provide benefits to small enterprises that operate as private limited companies. Small businesses generate less money per year than larger businesses. But these small businesses have an important role in generating profits and increasing employment in developing countries such as India. As a result, they serve as the backbone of the economy.
To be registered under the Companies Act, small companies do not have to follow any separate procedure. In fact, a small company is registered as a private limited company. However, the law differentiates a private limited company from a small company based on its less amount of investment and turnover.
Definition of Small Company as per Companies Act 2013
A small company is defined under Section 2(85) of the Companies Act 2013. It is a private limited company whose paid-up share capital and turnover are within the limits specified by Government.
For the ease of doing business, Rule 2(1)(t) of the Companies (Specification of Definitions Details) Amendment Rules, 2021 dated 01.02.2021 has amended the definition of a small company with effect from 1st April 2021.
Hence, from the financial year 2021-22, the threshold limits for determining the ambit of small companies have been enhanced.
Earlier, the threshold limit of paid-up share capital was Rs. 50 lacs that has been increased to Rs. 2 crores and the limit of turnover was Rs. 2 crores that has been increased to Rs. 20 crores.
Therefore, the definition of Small Company under Section 2(85) read with Rule 2(1)(t) of the Companies (Specification of Definitions Details) Rules, 2014, to be effective from 1st April 2021 is as under:
A ‘small company’ is defined as a company, other than a public company whose paid-up share capital does not exceed Rs. 2 crores or such higher prescribed amount which shall not be more than Rs. 10 crores, and whose turnover of the preceding financial year does not exceed Rs. 20 crores or such higher prescribed amount which shall not be more than Rs. 100 crores.
Breaking down the definition of Small Company
A small company is a private limited company that satisfies both the following conditions:
- Paid-up share capital does not exceed Rs. 2 crores or such higher prescribed amount which shall not be more than Rs. 10 crores, and
- Turnover of the preceding financial year does not exceed Rs. 20 crores or such higher prescribed amount which shall not be more than Rs. 100 crores.
Remember, this definition has to be made applicable for the financial year 2021-22 onwards. For previous financial years, the status of small companies must be assessed with reference to previous paid-up share capital and turnover limits of Rs. 50 lacs and Rs. 2 crores respectively.
The above definition of a small company is not applicable to the following (i.e.,a small company cannot be the below ones):
- A public company
- A holding company or a subsidiary company
- A company registered under Section 8
- A company or body corporate that is governed by any Special Act
Thus, even though the above-mentioned companies satisfy the capital and turnover requirements, they would nevertheless fall beyond the purview of ‘Small Company’ and, consequently, the advantages applicable to a small company cannot be extended to them.
Benefits available to small companies
You may know that small companies face less burden of compliance and they enjoy a wide range of benefits granted to them under the Companies Act.
For example, unlike other companies, the Board’s Report of One Person Company and Small Company has to be prepared in abridged form.
Similarly, the annual return of One Person Company and Small Company has to be signed only by a Company Secretary or if there is no CS, by the company’s director. But it is not required to be signed both by a director and the Company Secretary as is in the case of other companies.
In the case of other companies, the annual return must be signed by both a director as well as a Company Secretary, or if there is no CS, then by a Company Secretary in practice.
Some other advantages enjoyed by small companies are that they are not needed to give cash flow statements with the financial statements. Also, instead of four, they are just required to hold two Board Meetings, one in each half of the calendar year. But the gap between the two meetings should not be less than 90 days.
For more details on small companies and the benefits granted to them, please refer to this blog:
I hope the information given in this blog is of help!
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