Small Company: Definition and Exemptions under Companies Act, 2013

The Companies Act, 2013 brought a major upgrade to the company laws in India. In fact, it also introduced certain changes to the small company definition and exemptions. The Act was passed with the aim of making company registration in India accessible to all. Moreover, it is a fact that there are companies of different sizes and scalability capacities. The size of a company depends on a lot of factors. So, if you are looking to start a new business in India, it is very important that you understand what is a small company in companies Act and how it functions. Moreover, once you get the title of being a small companies definition in Companies Act, 2013 you are also entitled to certain exceptions. So, let’s delve into the concept of small company: definition and exceptions! 

What is a small company as per Companies Act 2013?

According to the small company definition in the companies Act 2013, any company other than a public company, which fulfills the following criteria is a small company: 

• The paid up share capital must not exceed INR 50 Lakh or the prescribed capital must not amount to more than ten crore rupees; and 
• Turnover of the immediately preceding financial year is not more than INR 2 crores.

The usage of ‘and’ in the definition of small company implies that the fulfillment of both these criteria are important to get the ‘small company’ definition under the Companies Act, 2013. 

Important Note: It is not necessary that a small company enjoys its status forever. As soon as a company crosses either of the thresholds mentioned above, it loses the status of being a small company in India.  

Which company can be a small company? 

According to the Act, the following types of company are not eligible to be a small company even if they meet the above said criteria: 

• Public companies;
• Holding company; 
• Subsidiary company; 
• Section 8 company; and
• Statutory company. 

Also Read: What is Private Limited Company?

Changes to the small company definition

In September 2022, the Government of India passed a Notification, to bring into effect the new definition of a small company under the Companies Act, 2013. Before this amendment the threshold for being a small company was completely different. Let’s take a look at both the old and new definitions for small companies in India. 

Definition of Small Company	Threshold for Paid Up Capital	Threshold for Annual Turnover
Old Definition	Up to Rs. 50,00,000/-	Up to Rs. 2,00,00,000/-
New Definition	Up to Rs. 2,00,00,000/-	Up to Rs. 20,00,00,000/-

Characteristics of small company in India

Small companies in India are very common. Moreover, post the covid 19 pandemic, people of India are driven towards having their own small businesses. This helps in creating a good ecosystem in the nation. With that said, let’s take a look at the different characteristics of small companies in India:

Limited scope

As seen above, there is a threshold limit for all small companies in India. To have the entitlement of a small company, you need to work between these threshold limits only. If your turnover or paid up capital exceeds the threshold, the company may lose its status. 

Local business operations

As evident from the threshold limits, the business operations in a small company are usually pretty localized. 

Flexible operations

Since the business is small, these types of companies have pretty flexible operations. Moreover, these companies are also usually owner driven and this makes the business process easy to manage. 

Access to schemes

To promote the business ecosystem and the ease of doing business in India, the government time and again introduces certain schemes to benefit the small companies of India. As a part of these initiatives and schemes, the companies get a chance to grow beyond certain complexities. 

What are the benefits to small companies?

Based on the size of a business, its capacity of complying with the laws and mandates also changes. However, the company registration process here remains the same. There are many annual compliances that may be very important for a large scale enterprise, but merely creates a burden for a small company owner. The government of India is very mindful of supporting the growth of small businesses in India. As a result, a company defined as small company has a right to following exceptions under the law:

Meeting of board of directors

All companies incorporated under the Companies Act, 2013 need to hold 4 Board of Directors in each year. However, small companies only need to have 2 Board of Directors meetings each year. The only catch is, that the distance between the two meetings should not be less than 90 days. 

Financial statement

It is not mandatory for small companies to include their ‘cash flow’ statement in their financial statements. 

Remuneration in annual return

All companies need to provide the detailed statement of remuneration given to their Directors and Key managerial personnel in their annual return. However, a small company is exempted from providing a detailed statement, it just needs to give only an aggregate of the amount drawn by the Directors and KMP. 

Also Read: Importance of Memorandum of Association

Signature on annual return

For companies, it is mandatory to get a signature of the company secretary on their annual returns. However, in a small company they have the exception, that if there is no company secretary, the annual return can be signed by any one Director. 

Rotation of auditors

Under section 139(2) of the act, the companies need to go through a mandatory rotation of auditors appointed. However, the small companies are exempted from this clause entirely. 

Internal financial control

Companies falling under the small company definition do not have to submit a report on how they manage their finances. It need not show reports of its adequacy in the auditor’s report. Whilst for other companies, this is mandatory. 

Less penalties

According to section 446B of the companies act, 2013, if a small company fails to comply with certain provisions of the act, the penalty applicable is way less as compared to any other type of company. The most minimal charges are applicable to small companies as penalties, keeping in mind their status and turnover. 

Reasons to revise the meaning of small company in Companies Act

The definition of a small company in India is subject to revisions, based on the discretion of the government. There are many different reasons that lead to these changes in the threshold, depending on the entire ecosystem of a country or particular jurisdictions. Let’s take a look at some of the reasons that lead to revision in the meaning and definition of small company in India: 

Changes to the economy

The growth of the nation as a whole, the inflation rates, and ever evolving market dynamics may necessitate the revision of what is a small company. 

To Increase competition

Healthy competition in the market is very important for the global expansion of the nation’s economy. While many companies have the potential, they cannot grow to its full potential because of limited resources, many times. When certain companies are tagged as a small company, and get access to benefits, it makes higher chances of increasing the competition in the local as well as global market. 

Cost of living

Economic factors such as the cost of living also impact the government’s decision on the threshold limits for various benefits that companies incorporated in India can avail.

Why are small companies entitled to exceptions? 

Most regulatory provisions from which the small companies are getting exemptions are put in place specifically for large scale enterprises. These provisions will only create burdens for small businesses. This helps in easing the management and operations of a small company. 

Also Read: Udyam Registration Benefits for MSMEs

Conclusion

Many times business owners might not even understand if their company falls under the small company definition or not. This leads to them missing out on the benefits of being a small company. If you opt to get your Pvt. Ltd. Company registration from certified online service providers like LegalWiz.in, the experts guide all business owners about all such implications of starting a new business in India.