Definition & Meaning of a Small Company U/S 2(85) of the Companies Act, 2013
The definition of a small company under the Companies Act, 2013, was revised to reduce compliance burdens and encourage ease of doing business, especially for startups and smaller entities. Here’s a summary of the key changes and benefits based on the latest amendment:
New Definition of a Small Company:
Under Section 2(85) of the Companies Act, 2013, a small company is defined as a company that is:
- Not a public company.
- Has a paid-up share capital of up to ₹4 crore (which can be increased up to ₹10 crore).
- Has a turnover of up to ₹40 crore (which can be increased up to ₹100 crore).
Exclusions New Definition of a Small Company
The following companies are not considered small companies, regardless of capital or turnover:
- A holding or subsidiary company.
- A company registered under Section 8 (non-profit entities).
- Companies governed by any special Act.
Comparison Between Old and New Definitions:
|
Particulars |
Old Definition |
New Definition |
|---|---|---|
|
Paid-up share capital |
Up to INR 2 crore |
Up to INR 4 crore (can be increased to INR 10 crore) |
|
Turnover |
Up to INR 20 crore |
Up to INR 40 crore (can be increased to INR 100 crore) |
Loss of Small Company Status: A company’s status as a small company is determined annually based on its paid-up capital and turnover. If a company exceeds the limits in any financial year, it will lose its small company status in the following year and must comply with the full set of requirements applicable to larger private limited companies.
Impact on Startups: : Most startups in India qualify as small companies under the new definition, as their paid-up capital and turnover typically fall within the revised thresholds. This provides them with significant compliance relief, fostering growth and innovation
What is Characteristics of a Small Company?
- Low Profitability and Revenue: Small companies generally generate less revenue compared to larger companies, but lower revenue does not necessarily mean lower profitability.
- Fewer Employees: They tend to have a smaller workforce and are often managed by a single person or a small team.
- Smaller Market Area: They typically serve smaller markets, often localized to specific communities or regions.
- Limited Locations: Most small companies operate from a single location and are unlikely to have multiple branches or international presence.
Benefits for Small Companies Under the Companies Act, 2013:
- Board Meetings: Small companies are required to hold only two board meetings per financial year, compared to four for other private limited companies.
- Annual Return: The annual return for a small company can be signed by either a Company Secretary (CS) or a director. For other companies, both signatures are required.
- Cash Flow Statement: Small companies are exempt from preparing a cash flow statement, which is otherwise mandatory for private limited companies.
- Auditors Rotation: Small companies are exempt from the mandatory rotation of auditors every 5 to 10 years.
- Fees and Penalties: Small companies pay lesser fees for filings with the Registrar of Companies (ROC) and are subject to reduced penalties compared to larger companies.
- Abridged Forms:
- They need to file an abridged director’s report instead of a comprehensive one.
- Annual returns are filed using Form MGT-7A, a simplified version of Form MGT-7 used by larger companies.
- They are also exempt from preparing a detailed report on their Annual General Meeting (AGM).
