[This post elucidates the eligibility status of Small Companies and the benefits given to small company promoters and directors.]
The Companies Act, 2013 (‘Act’) introduced the concept of small companies to provide advantages for small businesses operating as private limited companies.
Small companies do not have any separate procedure to obtain registration under the Act. Akin to any other private limited company, a small company is registered as a private limited company. However, the Act differentiates a private company from a small company based on its lower investment and turnover.
The Ministry of Corporate Affairs (MCA) had earlier, vide the Companies (Specification of Definition details) Amendment Rules 2021, revised the definition of small companies by increasing their thresholds for paid capital from not exceeding INR 50 lakh to not exceeding INR 2 crore and Turnover from not exceeding INR 2 crore to not exceeding INR 20 crores. This definition of small companies has now been revised by increasing thresholds for paid-up capital from “not exceeding Rs. 2 crores” to “not exceeding Rs. 4 crores” and Turnover from “not exceeding Rs. 20 crores” to “not exceeding Rs. 40 crores”
In rule 2, in sub-rule (1), after clause(s), the following clause shall be inserted namely;
The paid-up share capital is equal to or below Rs. 4 crore, or a higher amount specified not exceeding Rs. 10 crore
The turnover is equal to or below Rs. 40 crore, or a higher amount specified not exceeding Rs. 100 crore
Accordingly, the definition of Small Company under section 2(85) shall be read as under: Small Company means a company, other than a public company— 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 and turnover of which as per profit and loss account for the immediately preceding financial year does not exceed forty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:
Accordingly, the definition of Small Company under section 2(85) shall be read as under:
Small Company means a company, other than a public company— with paid-up share capital which does not exceed four crore rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees and turnover of which as per profit and loss account for the immediately preceding financial year does not exceed forty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees.
These rules may be called the Companies (Specification of Definition Details) Amendment Rules 2021. The above change in the definition of small company shall come into force on the 1st day of April 2021
The above modification was notified [vide Gazette notification Part II-section-3-sub-section (i)] dated February 1, 2021.
What is a small company?
A Small company is a Private Limited Company, with a limited investment and the privilege of special status under the Companies Act, 2013. The concept of a small company was introduced in the Companies Act 2013. According to Section 2(85) of the Companies Act 2013, a Small company means a company that satisfies the following two conditions:-
*The above conditions have since been amended in the companies’ amendment rules 2021 which will be in force from April 1, 2021. As per the amendment to Companies Rules 2021, paid-up capital and turnover of the small company shall not exceed Rs two crores and Rs twenty crores respectively.
The following type of company is not treated as a Small Company if:-
- It is a Public Company.
- It is a Holding of another company.
- The company is a subsidiary of another company.
- The company is a Section 8 Company.
- It is a company governed by any Special Act.
Privileges of a Small Company:
Companies Act 2013 provides certain benefits to Small companies which include:-
Board Meeting: A Small Company needs to hold only 2 Board meetings in a calendar year as against 4 meetings with other companies. However, the gap between the two board meetings should not be less than 90 days.
Annual Return: In the case of a Small Company, the Annual Return can be signed by the Company Secretary alone or if there is no CS, by a single Director only.
Cash Flow Statement: A Small company does not require maintaining a Cash flow statement as a part of its Financial Statements.
Rotation of Auditors: A Small company is exempt from rotating the auditors according to Section 139(2) of the Companies Act 2013.
Audit Report: A Small Company does not require to report in its Audit Report regarding Internal Financial controls and the operating effectiveness of the company.
Penalties: The Company Act 2013 prescribes lesser penalties to small companies as compared to every other company.
Small companies enjoy a lower corporate tax rate of 25%, compared to the usual 30% for other companies. This reduction can significantly boost your bottom line, allowing you to reinvest more into your business.
The government and financial institutions provide numerous schemes to support the growth of small and medium enterprises (SMEs). These include access to collateral-free loans, priority sector lending, subsidies, and grants, making it easier for small companies to get the financial backing they need.
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