Small Company Definition, Characteristics, Benefits and Process

Small Company Definition, Characteristics, Benefits and Process. Small companies are important players in the Indian economy. They boost employment, encourage innovation, and promote entrepreneurship. To support these enterprises, the Companies Act, 2013 introduced the concept of a "Small Company." Understanding the Small Company Definition, its characteristics, benefits, and registration process is essential for entrepreneurs who wish to manage their businesses with lesser compliance burdens.
What is a Small Company?
A Small Company is a type of private limited company that meets specific criteria under the Companies Act, 2013. It is not a public company. Small companies are differentiated from other private companies based on their lower paid-up capital and turnover limits. They play a significant role in India's economic development by creating jobs and boosting profits in various sectors.
Small companies often operate on a smaller scale, have fewer employees, and cover a smaller geographical area. The intent behind creating the Small Company classification was to give these businesses an opportunity to operate efficiently with reduced compliance costs and simple governance structures.
Small Company Definition under the Companies Act, 2013
As per Section 2(85) of the Companies Act, 2013, a Small Company means a company, other than a public company:

Whose paid-up share capital does not exceed INR 4 crore or such higher amount as may be prescribed, but not more than INR 10 crore.

Whose turnover, as per the profit and loss account for the immediately preceding financial year, does not exceed INR 40 crore or such higher amount as may be prescribed, but not more than INR 100 crore.

However, the Small Company Definition excludes the following types of companies:

Public companies

Holding companies

Subsidiary companies

Section 8 companies (not-for-profit organizations)

Companies governed under any Special Act

This means that even if a company fulfills the paid-up capital and turnover criteria, it cannot be classified as a small company if it falls under any of the exclusions mentioned above.
Evolution of the Small Company Definition
The Small Company Definition has evolved over time to cover more companies under its ambit and to ease their compliance burden.

Initially, the threshold for a small company was a paid-up capital of up to INR 50 lakh and a turnover of up to INR 2 crore.

In 2021, the government revised the limits to a paid-up capital of up to INR 2 crore and a turnover of up to INR 20 crore.

In 2022, the definition was further expanded to a paid-up capital of up to INR 4 crore and a turnover of up to INR 40 crore.

These changes were brought through the Companies (Specification of Definitions Details) Amendment Rules, 2022, which came into effect on 15th September 2022. The increase in thresholds was aimed at making more companies eligible to be classified as small companies, allowing them to avail the related benefits.
Characteristics of a Small Company
Knowing the features of a Small Company is important because it shows how these companies function differently from medium or large-sized companies.

Low Paid-Up Capital and Turnover: Small companies have lower financial thresholds compared to bigger corporations. Their paid-up share capital and annual turnover remain within the prescribed limits, making them more accessible for small entrepreneurs.

Ownership Structure: Typically, a small company is privately owned, either by a few individuals or families. It is easier to manage because of its limited size and shareholder structure.

Simplified Management: The governance structure of a small company is simpler. It usually requires only two directors to function, unlike larger companies that require a more extensive board and committees.

Limited Geographical Presence: Most small companies operate within a limited geographical area, such as a single state, city, or even a town. They focus on serving local or niche markets.

Smaller Employee Base: Given their size, small companies generally have fewer employees. Sometimes, the business can be managed by a handful of individuals or even a single entrepreneur.

Reduced Compliance Requirements: Small companies enjoy relaxation from several regulatory requirements, making their compliance burden lighter compared to larger companies.

Benefits of Being Classified as a Small Company
The Small Company Definition offers multiple advantages, encouraging more entrepreneurs to register their businesses under this category.

Fewer Board Meetings: Unlike other companies that must hold at least four board meetings annually, small companies are required to conduct only two board meetings every financial year. This saves time and operational costs.

Abridged Annual Return Filing: Small companies can file an abridged version of the annual return in Form MGT-7A, reducing the amount of information and paperwork needed compared to the standard Form MGT-7 used by larger companies.

No Mandatory Cash Flow Statement: While preparing financial statements, small companies are not required to include a cash flow statement. This reduces the complexity and cost of accounting compliance.

Exemption from Auditor Rotation: Small companies are exempted from the mandatory rotation of auditors every five or ten years, which otherwise applies to larger companies.

Lower Filing Fees and Penalties: The Registrar of Companies (ROC) prescribes lower fees for filing forms for small companies. Also, if a small company fails to comply with the Companies Act provisions, they are subjected to reduced penalties compared to larger companies.

Simplified Director’s Report: The Directors’ Report for small companies can be abridged, making it easier and less expensive to prepare.

Fast-Track Merger Option: Small companies have the option to undergo mergers through a simplified fast-track process under Section 233 of the Companies Act, saving both time and legal expenses.

How to Register a Small Company?
Registering a Small Company is similar to registering a regular private limited company. Here are the detailed steps:
1. Obtain Digital Signature Certificate (DSC) 
All the proposed directors and shareholders must first obtain their DSCs. It is essential for signing electronic documents online.
2. Reserve Company Name 
You need to apply for name reservation through the Part-A of SPICe+ form on the MCA portal. The name should be unique and should not violate any trademark or existing company name rules.
3. Prepare Incorporation Documents 
The following documents must be prepared:

Memorandum of Association (MOA)

Articles of Association (AOA)

Identity and Address Proofs of subscribers and directors

Professional Declaration by a CA, CS, or Advocate

Affidavits and declarations confirming no prior convictions

4. Submit SPICe+ Form 
Fill Part-B of SPICe+ form, attach all required documents, and pay the prescribed government fees and stamp duty.
5. Receive Certificate of Incorporation 
Upon approval, the Registrar of Companies issues a Certificate of Incorporation, officially recognizing the formation of the company. Once incorporated, if the company meets the paid-up capital and turnover limits, it automatically qualifies as a small company.
Matters to be Included in the Board's Report for Small Companies
The Companies Act specifies certain mandatory disclosures in the Board’s Report for small companies. These include:

Web Link for Annual Return: If available, mention the web link where the company’s annual return has been uploaded.

Number of Board Meetings Held: State how many board meetings were conducted during the financial year.

Directors' Responsibility Statement: The directors must confirm that they have followed the necessary accounting standards and have prepared the financial statements responsibly.

Fraud Reporting: Disclose any frauds detected and reported by the auditors, except those which must be reported to the Central Government.

Explanations to Auditor Remarks: Provide explanations or comments for any adverse remarks, qualifications, or reservations mentioned in the auditor’s report.

Company Affairs Summary: Summarize the overall affairs of the company, mentioning the nature of business and major achievements.

Financial Summary: Highlight the financial performance by presenting a summary of profits, revenues, and expenses.

Major Changes After Financial Year-End: Report any major events occurring after the closure of the financial year that could affect the business.

Director Changes: Mention any appointments or resignations of directors during the year.

Significant Legal Orders: Include any significant orders passed by courts or regulators that may affect the company’s future operations.

Conclusion
The Small Company Definition under the Companies Act, 2013 provides a supportive framework for entrepreneurs who are looking to start and manage businesses efficiently. By recognizing the importance of small companies in employment generation and economic growth, the government has offered significant compliance relaxations.
Registering as a Small Company brings benefits such as simplified compliance, reduced costs, and fewer regulatory formalities. However, it is essential for entrepreneurs to monitor their paid-up capital and turnover annually. Once they cross the specified limits, they lose the benefits applicable to a small company.
If you need any support then you can connect with Compliance Calendar’s Experts through email info@ccoffice.in or Call/Whatsapp at +91 9988424211.
FAQs 
Q1. What is the meaning of a Small Company under the Companies Act, 2013? 
Ans. A Small Company is a private company that meets specific financial thresholds set under Section 2(85) of the Companies Act, 2013. It should have a paid-up share capital not exceeding INR 4 crore and a turnover not exceeding INR 40 crore.
Q2. Can a public company be classified as a Small Company? 
Ans. No, a public company cannot be classified as a Small Company. The definition specifically excludes public companies, holding companies, subsidiaries, Section 8 companies, and companies governed under special acts.
Q3. What are the compliance benefits available to Small Companies? 
Ans. Small Companies enjoy several compliance benefits, including fewer board meetings, simplified annual return filing, no need for a cash flow statement, exemption from auditor rotation, and reduced filing fees and penalties.
Q4. Is it necessary to file a cash flow statement for a Small Company? 
Ans. No, Small Companies are exempted from preparing a cash flow statement as a part of their financial statements, making financial reporting simpler and cost-effective.
Q5. How does a company lose its Small Company status? 
Ans. If in any financial year the company's paid-up capital exceeds INR 4 crore or turnover exceeds INR 40 crore, it will lose its status as a Small Company for the next financial year and will have to comply with regular company regulations.
Q6. Can a Small Company file an abridged Director's Report? 
Ans. Yes, Small Companies are allowed to file an abridged version of the Director's Report and an abridged annual return in Form MGT-7A, saving time and effort in compliance.
Q7. What is the process for registering a Small Company? 
Ans. The process involves obtaining Digital Signature Certificates (DSCs), reserving a company name through the SPICe+ form, preparing incorporation documents, filing the SPICe+ form with required documents and fees, and obtaining a Certificate of Incorporation from the Registrar of Companies (ROC).

Small companies are important players in the Indian economy. They boost employment, encourage innovation, and promote entrepreneurship. To support these enterprises, the Companies Act, 2013 introduced the concept of a "Small Company." Understanding the Small Company Definition, its characteristics, benefits, and registration process is essential for entrepreneurs who wish to manage their businesses with lesser compliance burdens.

What is a Small Company?

A Small Company is a type of private limited company that meets specific criteria under the Companies Act, 2013. It is not a public company. Small companies are differentiated from other private companies based on their lower paid-up capital and turnover limits. They play a significant role in India's economic development by creating jobs and boosting profits in various sectors.

Small companies often operate on a smaller scale, have fewer employees, and cover a smaller geographical area. The intent behind creating the Small Company classification was to give these businesses an opportunity to operate efficiently with reduced compliance costs and simple governance structures.

Small Company Definition under the Companies Act, 2013

As per Section 2(85) of the Companies Act, 2013, a Small Company means a company, other than a public company:

Whose paid-up share capital does not exceed INR 4 crore or such higher amount as may be prescribed, but not more than INR 10 crore.
Whose turnover, as per the profit and loss account for the immediately preceding financial year, does not exceed INR 40 crore or such higher amount as may be prescribed, but not more than INR 100 crore.

However, the Small Company Definition excludes the following types of companies:

Public companies
Holding companies
Subsidiary companies
Section 8 companies (not-for-profit organizations)
Companies governed under any Special Act

This means that even if a company fulfills the paid-up capital and turnover criteria, it cannot be classified as a small company if it falls under any of the exclusions mentioned above.

Evolution of the Small Company Definition

The Small Company Definition has evolved over time to cover more companies under its ambit and to ease their compliance burden.

Initially, the threshold for a small company was a paid-up capital of up to INR 50 lakh and a turnover of up to INR 2 crore.
In 2021, the government revised the limits to a paid-up capital of up to INR 2 crore and a turnover of up to INR 20 crore.
In 2022, the definition was further expanded to a paid-up capital of up to INR 4 crore and a turnover of up to INR 40 crore.

Characteristics of a Small Company

Knowing the features of a Small Company is important because it shows how these companies function differently from medium or large-sized companies.

Low Paid-Up Capital and Turnover: Small companies have lower financial thresholds compared to bigger corporations. Their paid-up share capital and annual turnover remain within the prescribed limits, making them more accessible for small entrepreneurs.
Ownership Structure: Typically, a small company is privately owned, either by a few individuals or families. It is easier to manage because of its limited size and shareholder structure.
Simplified Management: The governance structure of a small company is simpler. It usually requires only two directors to function, unlike larger companies that require a more extensive board and committees.
Limited Geographical Presence: Most small companies operate within a limited geographical area, such as a single state, city, or even a town. They focus on serving local or niche markets.
Smaller Employee Base: Given their size, small companies generally have fewer employees. Sometimes, the business can be managed by a handful of individuals or even a single entrepreneur.
Reduced Compliance Requirements: Small companies enjoy relaxation from several regulatory requirements, making their compliance burden lighter compared to larger companies.

Benefits of Being Classified as a Small Company

The Small Company Definition offers multiple advantages, encouraging more entrepreneurs to register their businesses under this category.

Fewer Board Meetings: Unlike other companies that must hold at least four board meetings annually, small companies are required to conduct only two board meetings every financial year. This saves time and operational costs.
Abridged Annual Return Filing: Small companies can file an abridged version of the annual return in Form MGT-7A, reducing the amount of information and paperwork needed compared to the standard Form MGT-7 used by larger companies.
No Mandatory Cash Flow Statement: While preparing financial statements, small companies are not required to include a cash flow statement. This reduces the complexity and cost of accounting compliance.
Exemption from Auditor Rotation: Small companies are exempted from the mandatory rotation of auditors every five or ten years, which otherwise applies to larger companies.
Lower Filing Fees and Penalties: The Registrar of Companies (ROC) prescribes lower fees for filing forms for small companies. Also, if a small company fails to comply with the Companies Act provisions, they are subjected to reduced penalties compared to larger companies.
Simplified Director’s Report: The Directors’ Report for small companies can be abridged, making it easier and less expensive to prepare.
Fast-Track Merger Option: Small companies have the option to undergo mergers through a simplified fast-track process under Section 233 of the Companies Act, saving both time and legal expenses.

How to Register a Small Company?

Registering a Small Company is similar to registering a regular private limited company. Here are the detailed steps:

1. Obtain Digital Signature Certificate (DSC)

All the proposed directors and shareholders must first obtain their DSCs. It is essential for signing electronic documents online.

2. Reserve Company Name

You need to apply for name reservation through the Part-A of SPICe+ form on the MCA portal. The name should be unique and should not violate any trademark or existing company name rules.

3. Prepare Incorporation Documents

The following documents must be prepared:

Memorandum of Association (MOA)
Articles of Association (AOA)
Identity and Address Proofs of subscribers and directors
Professional Declaration by a CA, CS, or Advocate
Affidavits and declarations confirming no prior convictions

4. Submit SPICe+ Form

Fill Part-B of SPICe+ form, attach all required documents, and pay the prescribed government fees and stamp duty.

5. Receive Certificate of Incorporation

Upon approval, the Registrar of Companies issues a Certificate of Incorporation, officially recognizing the formation of the company. Once incorporated, if the company meets the paid-up capital and turnover limits, it automatically qualifies as a small company.

Matters to be Included in the Board's Report for Small Companies

The Companies Act specifies certain mandatory disclosures in the Board’s Report for small companies. These include:

Web Link for Annual Return: If available, mention the web link where the company’s annual return has been uploaded.
Number of Board Meetings Held: State how many board meetings were conducted during the financial year.
Directors' Responsibility Statement: The directors must confirm that they have followed the necessary accounting standards and have prepared the financial statements responsibly.
Fraud Reporting: Disclose any frauds detected and reported by the auditors, except those which must be reported to the Central Government.
Explanations to Auditor Remarks: Provide explanations or comments for any adverse remarks, qualifications, or reservations mentioned in the auditor’s report.
Company Affairs Summary: Summarize the overall affairs of the company, mentioning the nature of business and major achievements.
Financial Summary: Highlight the financial performance by presenting a summary of profits, revenues, and expenses.
Major Changes After Financial Year-End: Report any major events occurring after the closure of the financial year that could affect the business.
Director Changes: Mention any appointments or resignations of directors during the year.
Significant Legal Orders: Include any significant orders passed by courts or regulators that may affect the company’s future operations.

Conclusion

The Small Company Definition under the Companies Act, 2013 provides a supportive framework for entrepreneurs who are looking to start and manage businesses efficiently. By recognizing the importance of small companies in employment generation and economic growth, the government has offered significant compliance relaxations.

Registering as a Small Company brings benefits such as simplified compliance, reduced costs, and fewer regulatory formalities. However, it is essential for entrepreneurs to monitor their paid-up capital and turnover annually. Once they cross the specified limits, they lose the benefits applicable to a small company.

If you need any support then you can connect with Compliance Calendar’s Experts through email info@ccoffice.in or Call/Whatsapp at +91 9988424211.

FAQs

Q1. What is the meaning of a Small Company under the Companies Act, 2013?

Ans. A Small Company is a private company that meets specific financial thresholds set under Section 2(85) of the Companies Act, 2013. It should have a paid-up share capital not exceeding INR 4 crore and a turnover not exceeding INR 40 crore.

Q2. Can a public company be classified as a Small Company?

Ans. No, a public company cannot be classified as a Small Company. The definition specifically excludes public companies, holding companies, subsidiaries, Section 8 companies, and companies governed under special acts.

Q3. What are the compliance benefits available to Small Companies?

Ans. Small Companies enjoy several compliance benefits, including fewer board meetings, simplified annual return filing, no need for a cash flow statement, exemption from auditor rotation, and reduced filing fees and penalties.

Q4. Is it necessary to file a cash flow statement for a Small Company?

Ans. No, Small Companies are exempted from preparing a cash flow statement as a part of their financial statements, making financial reporting simpler and cost-effective.

Q5. How does a company lose its Small Company status?

Ans. If in any financial year the company's paid-up capital exceeds INR 4 crore or turnover exceeds INR 40 crore, it will lose its status as a Small Company for the next financial year and will have to comply with regular company regulations.

Q6. Can a Small Company file an abridged Director's Report?

Ans. Yes, Small Companies are allowed to file an abridged version of the Director's Report and an abridged annual return in Form MGT-7A, saving time and effort in compliance.

Q7. What is the process for registering a Small Company?

Ans. The process involves obtaining Digital Signature Certificates (DSCs), reserving a company name through the SPICe+ form, preparing incorporation documents, filing the SPICe+ form with required documents and fees, and obtaining a Certificate of Incorporation from the Registrar of Companies (ROC).