Small Company Definition in India

What are Small Companies?

Small companies, as defined by the Companies Act 2013, are private limited businesses with lower annual revenue compared to regular-sized companies. They follow the same registration process as private limited companies but have distinct financial criteria. To be classified as a small company as per the Companies Act, a business must meet the revised thresholds for paid-up capital and turnover.

The significance of small companies in India's economy cannot be overstated. They contribute to profit generation and job creation, making them essential drivers of economic growth. By providing goods and services to local communities and niche markets, small companies help foster inclusive development across the country.

The New Definition of Small Company

A small company is now defined as a non-public entity as per the Companies (Specification of Definition details) Amendment Rules, 2022, effective from 15 September 2022, if it meets the following conditions:

• Small company paid-up capital should not exceed ₹4 Crores, or such higher amount specified, which should not exceed ₹10 Crores.
  

• Small company turnover limit should not exceed ₹40 Crores, or such higher amount specified, which should not exceed ₹100 Crores.
  

It is important to note that certain companies are excluded from being classified as small companies, even if they meet the above criteria. These include:

• Public companies
  

• Holding companies
  

• Subsidiary companies
  

• Companies registered under Section 8 (non-profit companies)
  

• Companies governed by any special act
  

The 2022 amendment significantly broadened the scope for small companies, enhancing their eligibility for benefits and simplifying compliance requirements, thus fostering growth in the small business sector in India.

Earlier Definition of Small Companies 2021

Prior to the 2022 amendment, the definition of small companies underwent changes in 2021. The thresholds for paid-up capital and turnover were revised as follows:

These limits were initially increased from the previous thresholds of ₹50 lakhs for paid-up capital and ₹2 crores for turnover. 

The 2021 revision aimed to accommodate more businesses under the small company category and benefit them under the Companies Act 2013.

Comparing Small Company New Definition with Old Definitions

The Companies (Specification of Definition details) Amendment Rules, 2022, have further expanded the scope of small companies by increasing the limits for paid-up share capital and turnover. Here's a comparison of the key changes between the old and new definitions:

The increased thresholds allow more firms to be classified as small companies and avail of the benefits provided under the Companies Act 2013. This expansion is expected to reduce compliance burdens and facilitate ease of doing business for a larger number of small businesses in India.

Benefits of Revised Small Company Definition

Exemption from Preparing Cash Flow Statements

Small companies are not required to include cash flow statements in their financial reports, simplifying their accounting processes.

Simplified Annual Filings

They can prepare and file an abridged annual return, reducing administrative workload.

Fewer Board Meeting Requirements: 

Small companies are mandated to hold only two board meetings per year instead of four, which lessens operational demands.

Impact on Audit Processes

Small companies are mandated to hold only two board meetings per year instead of four, which lessens operational demands.

1. Auditors are not required to report on the adequacy of internal financial controls.
   

2. There is no compulsory rotation of auditors, which can reduce costs and administrative burdens.
   

Compliance Ease 

A director can sign annual returns in the absence of a company secretary, further streamlining operations.

Reduced Penalties for Non-Compliance: 

This encourages small companies to focus on growth rather than worrying excessively about penalties.

These exemptions and relaxations aim to ease the compliance burden on small companies, allowing them to focus on their core business activities and growth strategies.

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Characteristics of a Small Company in India

Small companies in India have distinct characteristics that set them apart from larger enterprises. Some of the key traits include:

Ownership Structure 

Typically, small companies are privately owned entities, often structured as private limited companies, partnerships, or sole proprietorships. This ownership model allows for greater control and flexibility in decision-making but limits access to larger capital investments.

Simplified Compliance

One of the key advantages of being classified as a small company is the reduced compliance burden. They benefit from exemptions, such as not needing to prepare cash flow statements, simplified annual filings, and fewer requirements for board meetings—only two are mandated per year. These measures significantly alleviate administrative pressures, allowing owners to focus on core business activities.

Auditing Requirements

Small companies face less stringent auditing requirements. For instance, they are not obligated to rotate auditors or report on the adequacy of internal financial controls, which reduces costs and simplifies financial oversight.

Limited Resources and Workforce

Small companies generally operate with limited resources and a smaller workforce. They often employ fewer staff members, sometimes relying on a single individual or a small team to manage operations. This can lead to agility in decision-making but may also pose challenges in scaling operations or managing increased demand.

Restricted Market Reach

The market reach of small companies is typically confined to local or regional areas. They often serve niche markets or specific community needs, such as convenience stores in rural areas. This limitation can hinder growth opportunities compared to larger firms with broader market access.

How to Register a Small Company as per the Companies Act 2013?

To register a business online as a small company under the Companies Act 2013, follow these steps:

1. Obtain Digital Signature Certificates (DSCs) for all proposed directors and subscribers
   

2. Reserve the company name by submitting Part-A of the SPICe+ form
   

3. File Part-B of the SPICe+ form along with required documents (Memorandum of Association (MOA), Articles of Association (AOA), Professional Declaration, Affidavits, Identity and Address Proofs, and Correspondence Address)
   

4. Pay prescribed fees and stamp duty for the SPICe+ form, MOA, and AOA
   

5. Obtain the Certificate of Incorporation from the Registrar of Companies (ROC) upon successful review of submitted documents
   

Matters to be included in the Board's Report for small companies:

• The web address for the Annual Return (if available)
  

• Number of Board meetings held during the year
  

• Directors' Responsibility Statement as per Section 134(5)
  

• Details of any frauds reported by the auditor under Section 143(12), except those reportable to the Central Government
  

• Explanations or comments on any qualifications, reservations, or adverse remarks in the auditor's report
  

• Summary of the company's current affairs and business overview
  

• Financial summary or highlights
  

• Material changes in the nature of the business after the financial year-end and their impact on the company's financial position
  

• Changes in directorship during the year
  

• Significant legal or regulatory orders affecting the company's going concern status or future operations
  

Synopsis of MCA Notification on Companies (Specification of Definition details) Amendment Rules 2022

The MCA has issued the Companies (Specification of Definition details) Amendment Rules, 2022, effective from 15 September 2022. The key amendments include:

1. Rule 2 has been amended by substituting a new clause 2(1)(t), which specifies the revised definition of small companies.
   

2. The thresholds for paid-up capital and turnover have been increased in the definition of a small company under the Companies Act 2013.
   

These amendments aim to provide relief to a larger number of businesses by classifying them as small companies and offering them various benefits and exemptions under the Companies Act 2013.