What is a Small Company in India?

The Companies Act, 2013 (‘Act’) introduced the concept of small companies to provide advantages for small businesses operating as private limited companies. Small companies have less annual revenue compared to regular-sized companies. In a developing country like India, small companies play a significant role in generating profits and boosting employment. Thus, they are the backbone of the economy.

Small companies do not have any separate procedure to obtain registration under the Act. It is registered as a private limited company. But the Act differentiates a private company as a small company based on its less amount of investment and turnover.

New Definition of a Small Company

The Finance Minister proposed a revised definition of a small company while presenting the Union Budget 2021. The revised definition came into effect on 1 April 2021. The MCA further amended the definition of a small company on 15 September 2022. The purpose behind the revised definition was to provide ease of doing business and reduce the compliance burden for many companies.

Accordingly, the Ministry of Corporate Affairs (MCA) notified the Companies (Specification of Definitions Details) Amendment Rules, 2022, to amend the old definition of a small company. The new definition is effective from 15 September 2022.

The new amended definition of a small company is provided under Section 2(85) of the Companies Act, 2013. The Act defines a small company as a company that is not a public company and has:

• A paid-up share capital equal to or below Rs.4 crore or such a higher amount specified not exceeding more than Rs.10 crores.
• A turnover equal to or below Rs.40 crore or such a higher amount specified not exceeding more than Rs.100 crore.

However, the concept of small companies does not apply to the following companies:

• A holding or a subsidiary company.
• A company registered under section 8 of Companies Act.
• A body corporate or company governed by any special act.

Most startups in India are classified as small companies as they will not have a paid-up capital of more than Rs.4 crores and an annual sales turnover of more than Rs.40 crores.

Comparison of Small Company New Definition with Old Definition 

The amendment to the definition of a small company increased the maximum limit of paid-up capital and turnover. The limits were increased so that more companies could be covered within the ambit of a small company, making them eligible to get the benefits of a small company provided under the Companies Act 2013.

The comparison of the old and new definitions of a small company is provided below:

Characteristics of a Small Company

Following are the characteristics of a small company:

Low Profitability and Revenue 

A small company has less revenue compared to medium and large companies. The revenue depends on the type of business and the capability to generate revenue. However, lower revenue cannot be considered as lower profitability of the company.

Fewer Employees

Since small companies have less paid-up capital and turnover, they onboard a small team of employees than large companies. Sometimes, small companies may even be handled by a single person or one team.

Smaller Market Area

Small companies serve the smaller sections of the community or society, like convenience shops in a rural township. Thus, they have a small market area for operating business activities.

Fewer locations

Generally, small companies have a limited area instead of several branches. They are usually not established in other countries and several states. The sales of small companies are confined to a single area.

Benefits for a Small Company Under the Companies Act, 2013

The Companies Act, 2013 provides many benefits in the form of relaxation in compliance, thus reducing the burden on these companies. The benefits to small companies under the Act are as follows:

Board Meetings 

Small companies must have a maximum of two meetings in a financial year. Whereas a private limited company that is not considered a small company must conduct four board meetings in a financial year.

Annual Return

The annual return filing of a small company can be signed by either a Company Secretary (CS) or a company director. The annual return filing of a private limited company other than a small company must be signed by both a director and a CS.

Cash Flow Statement

A small company need not maintain a cash flow statement as a part of its financial statement. Whereas a private limited company not coming under the category of a small company must mandatorily prepare a cash flow statement as a part of its financial statement.

Auditors Rotation

A small company does not require to rotate its auditors. However, a private limited company not classified as a small company must rotate its auditors every five to ten years as provided under the Act.

Fees and Charges

In the case of a Small Company, the Act prescribes lesser penalties compared to other private or public companies. It also provides less fees for filing forms with the ROC compared to the fees of other companies.

Abridged Forms

Small companies need not file directors’ report. They need to file the abridged directors’ report. An abridged directors’ report is not as vast as the directors’ report, and thus, they can omit many clauses that are present in the directors’report. Similarly, small companies must file their annual returns in Form MGT-7A. Form MGT-7A is the abridged version of Form MGT-7, which is filed by medium and large companies. A small company is also not required to prepare a report on the Annual General Meeting.

However, the status of a small company can change every year depending upon its paid-up capital and turnover limits. When a company crosses the thresholds provided in the new definition (either for paid-up capital or turnover), the benefits available during a financial year will be removed in the following year. The small company will lose its status as a small company and be treated as a private limited company not classified as a small company.

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