The Companies Act, 2013 introduced the term “small company” to extend benefits to privately held businesses with lower revenue brackets. These small entities contribute significantly to India’s economic growth by generating employment and supporting development, positioning themselves as crucial players in the national economy.
There isn’t a separate registration process for becoming a small company under the Act. Instead, such entities are incorporated as private limited companies and are identified as “small companies” based on specific thresholds for capital investment and turnover.
Updated Definition of a Small Company
A revised definition for small companies was introduced by the Finance Minister during the Union Budget 2021 and became applicable from 1 April 2021. Further updates were made by the Ministry of Corporate Affairs (MCA) through a notification dated 15 September 2022, amending the existing criteria to reduce compliance requirements and simplify business operations.
The Companies (Specification of Definitions Details) Amendment Rules, 2022, brought these changes into force starting 15 September 2022. Under Section 2(85) of the Companies Act, 2013, a small company is defined as one that:
- Is not a public company.
- Has a paid-up capital not exceeding Rs.4 crore, or a higher amount as prescribed, up to a maximum of Rs.10 crore.
- Has a turnover not exceeding Rs.40 crore, or a higher amount as prescribed, up to a ceiling of Rs.100 crore.
Exemptions from Small Company Classification
Certain companies are excluded from being classified as small companies, such as:
- Holding and subsidiary companies.
- Companies registered under Section 8 of the Act.
- Entities governed by any special legislative acts.
Many Indian startups fall under the small company classification, as they typically have capital and turnover within the prescribed thresholds.
Comparison Between the Old and New Definition of a Small Company
The revised definition of a small company has raised the upper limits for both paid-up share capital and turnover. This change was introduced to widen the scope and allow more companies to qualify for small company status, thereby availing themselves of the benefits granted under the Companies Act, 2013.
Below is a comparison outlining the shift in criteria:
| Particulars | Previous Criteria | Updated Criteria |
| Paid-up Share Capital | Up to Rs.2 crore | Up to Rs.4 crore |
| Turnover | Up to Rs.20 crore | Up to Rs.40 crore |
Key Characteristics of a Small Company
1. Limited Revenue and Profit Scope
Small companies typically generate lower revenue in comparison to medium or large-scale enterprises. However, a smaller revenue does not necessarily mean the business is unprofitable—profitability varies depending on operations and management efficiency.
2. Compact Workforce
Due to limited turnover and capital, small companies generally operate with a smaller number of employees. In many instances, such businesses might even be run by a sole proprietor or a tight-knit team.
3. Restricted Market Reach
These companies often cater to localized or community-based markets. For example, they may include local convenience stores serving rural populations, thereby operating in a more limited market environment.
4. Limited Physical Presence
Small companies usually function within a confined geographical area and do not maintain multiple branches. Their operations are typically localized to a single region, without expansion into multiple states or international locations.
Advantages for Small Companies Under the Companies Act, 2013
The Companies Act, 2013 offers several compliance relaxations to small companies, helping ease regulatory burdens. These relaxations are specifically designed to support smaller businesses and reduce their operational costs. Below are the key benefits provided:
1. Board Meetings
Small companies are required to hold only two board meetings in a financial year. In contrast, other private companies that do not fall under the small company category must convene four board meetings annually.
2. Annual Return Filing
A small company’s annual return can be signed by either a director or a Company Secretary (CS). On the other hand, a private company not classified as small must have its annual return signed by both a director and a CS.
3. Cash Flow Statement
Preparation of a cash flow statement is not mandatory for small companies as part of their financial statements. However, this requirement is compulsory for other private companies outside the small company bracket.
4. Auditor Rotation
Small companies are exempt from the rule requiring periodic rotation of auditors. Other private companies must rotate their auditors every five to ten years, as per the provisions of the Act.
5. Government Fees and Penalties
Small companies benefit from lower penalties and reduced filing fees when submitting forms to the Registrar of Companies (ROC), compared to larger private or public companies.
6. Abridged Reporting Requirements
Small companies can submit an abridged directors’ report, which is a shorter version of the standard report, omitting several detailed clauses. Additionally, they are required to file their annual return using Form MGT-7A, a simplified format compared to Form MGT-7 used by other companies. A report on the Annual General Meeting (AGM) is also not mandatory for small companies.
It’s important to note that the status of a small company is not permanent. If a company exceeds the prescribed thresholds for paid-up capital or turnover in a given financial year, it will lose its small company classification in the next financial year and will then be treated as a regular private limited company under the Act.
FAQs – Benefits for a Small Company Under the Companies Act, 2013
1. What is the minimum number of board meetings required for a small company?
A small company is required to hold only two board meetings in a financial year, unlike other private companies which must hold four.
2. Can a small company file an annual return without a Company Secretary?
Yes, a small company can get its annual return signed either by a director or a Company Secretary (CS). The presence of both is not mandatory.
3. Is it mandatory for a small company to maintain a cash flow statement?
No, small companies are exempt from preparing a cash flow statement as part of their financial statements.
4. Do small companies need to rotate their auditors?
No, small companies are not required to rotate auditors. Auditor rotation is applicable only to companies not classified as small under the Act.
5. What is the prescribed form for annual return filing by a small company?
Small companies must file their annual return using Form MGT-7A, which is an abridged version of Form MGT-7 used by other companies.
6. Does a small company have to file a detailed directors’ report?
No, small companies are allowed to submit an abridged directors’ report, which is a simplified version with fewer details.
7. Are the benefits of a small company permanent?
No, a company’s small company status can change. If its paid-up capital or turnover exceeds the prescribed limits in any financial year, it will lose the benefits in the following year.
8. Do small companies pay the same ROC filing fees as larger companies?
No, small companies enjoy reduced ROC filing fees and lower penalties under the Companies Act, 2013.
