Small Company Definition as Per Companies Act, 2013

Small Company Definition as Per Companies Act, 2013. The concept of a Small Company holds significant importance under the Companies Act, 2013. Recognizing the role of small businesses in driving economic growth, the Ministry of Corporate Affairs (MCA) introduced amendments to redefine small companies and provide them with various compliance relaxations. With the objective of reducing regulatory burdens, the Companies (Specification of Definitions Details) Amendment Rules, 2022, came into effect on September 15, 2022, thereby revising the criteria for classifying a company as a small company. These changes benefit private limited companies, particularly those contributing to employment generation and economic development in India.
What is a Small Company?
A Small Company is a private entity that operates on a smaller scale in terms of financial investment and revenue generation compared to larger corporations. The Companies Act, 2013, introduced the concept to support small businesses by easing certain compliance requirements, thereby fostering growth and sustainability. Unlike medium or large-scale businesses, a small company does not require a separate registration process. Instead, it is registered as a private limited company and is recognized as a small company based on its investment and turnover limits.
These companies form the backbone of the Indian economy, generating employment and contributing to innovation. Due to their limited financial size, they benefit from reduced compliance obligations, making it easier for them to operate efficiently. The small company definition ensures that such businesses receive appropriate legal recognition while enjoying simplified governance structures.
Revised Small Company Definition Under the Companies Act, 2013
According to Section 2(85) of the Companies Act, 2013, a company qualifies as a small company if it meets the following conditions:
1. The paid-up capital of the company should not exceed INR 4 crores or any higher amount as specified, but not exceeding INR 10 crores.
2. The turnover of the company should not exceed INR 40 crores or any higher amount as specified, but not exceeding INR 100 crores.
However, even if a company meets the above criteria, certain entities are not eligible to be classified as small companies. These include:
• Public Companies
• Holding Companies
• Subsidiary Companies
• Companies registered under Section 8 (not-for-profit entities)
• Companies governed by any special Act
The revised small company definition came into effect on September 15, 2022, replacing the earlier criteria where the maximum limits for paid-up share capital and turnover were INR 2 crores and INR 20 crores, respectively. The amendment significantly broadened the coverage, enabling more companies to benefit from the classification.
Comparison of the Old and New Small Company Definition
Over the years, the MCA has revised the small company definition multiple times to accommodate the changing business environment. Earlier, under the Companies (Specification of Definition Details) Amendment Rules, 2021, the threshold for paid-up capital was increased from INR 50 lakh to INR 2 crores, while the turnover limit was raised from INR 2 crores to INR 20 crores. The 2022 amendment further expanded these thresholds, increasing the maximum paid-up capital to INR 4 crores and the turnover limit to INR 40 crores.
These revisions reflect the government’s commitment to promoting small businesses by making them eligible for more exemptions and reduced compliance requirements. The changes ensure that businesses with relatively lower financial investments can still benefit from the regulatory relaxations offered under the Companies Act, 2013.
Key Benefits of the Revised Small Company Definition
The reclassification of small companies offers several advantages, making compliance less cumbersome. Small companies are exempted from preparing a cash flow statement as part of their financial statements, reducing the documentation burden. Additionally, they are allowed to file a simplified annual return, making the compliance process more streamlined.
One of the notable benefits includes the non-requirement of compulsory auditor rotation. Unlike larger corporations that must rotate auditors periodically, small companies can retain their auditors for an extended period, which helps maintain continuity and reduces compliance costs. Furthermore, auditors are not required to report on the adequacy of internal financial controls and their operational effectiveness in the auditor’s report.
Small companies also enjoy relaxed board meeting requirements, as they are only required to conduct two board meetings annually instead of the mandatory four meetings applicable to larger companies. The annual return of a small company can be signed either by a company secretary or, in the absence of one, by a director, offering flexibility in corporate governance.
Additionally, small companies face lesser penalties for non-compliance compared to other entities. This helps in reducing the financial risks associated with regulatory infractions, making it easier for small businesses to focus on growth rather than legal complications.
Characteristics of a Small Company in India
A small company in India is typically characterized by its limited operational scope and financial scale. These businesses operate with a simpler ownership and board structure, often with fewer shareholders and directors compared to larger firms. The regulatory framework ensures that small companies enjoy relaxed compliance obligations, making it easier for them to manage their business operations.
Most small companies have lower revenue and profit margins due to their smaller market reach. However, profitability is not solely dependent on revenue, as factors such as cost management and operational efficiency play a crucial role in determining financial success. Small companies generally employ fewer staff members, making them more bright in their decision-making processes.
Another defining characteristic of small companies is their limited geographic presence. Unlike large corporations with multiple branches or international operations, small businesses typically operate from a single location or within a restricted market area. This makes them more localized but also allows for a more personalized customer approach.
Registration Process for a Small Company in India
The registration process for a small company follows the same steps as that of a private limited company, One Person Company (OPC), or Limited Liability Partnership (LLP) under the Companies Act, 2013. The process begins with obtaining a Digital Signature Certificate (DSC) for all proposed directors. This is followed by name reservation through the MCA’s SPICe+ form, where a unique company name is submitted for approval.
Once the name is approved, the incorporation documents, including the Memorandum of Association (MOA) and Articles of Association (AOA), must be filed. These documents define the company’s objectives, rules, and management structure. After submitting the necessary affidavits, identity proofs, and address proofs, the Registrar of Companies (ROC) reviews the application. Upon successful verification, a Certificate of Incorporation is issued, marking the company’s official registration.
Matters to be Included in the Board’s Report for Small Companies
A small company is required to submit a Board’s Report that includes details such as the number of board meetings held, directors’ responsibility statements, and financial summaries. If the auditor identifies any frauds or adverse remarks, these must be disclosed in the report. Additionally, the report should highlight any material changes affecting business operations after the financial year-end and provide explanations for auditor qualifications.
Conclusion
The small company definition under the Companies Act, 2013, has evolved over time to accommodate the growing needs of businesses. With the 2022 amendment, the financial threshold for small companies has been significantly expanded, allowing more entities to benefit from reduced compliance obligations. These changes simplify business operations and encourage entrepreneurship and innovation in India. As small businesses continue to thrive, their role in generating employment and driving economic growth remains crucial in shaping the future of the Indian corporate model.
FAQs
Q1. What is the definition of a Small Company under the Companies Act, 2013?
Ans. A Small Company, as per Section 2(85) of the Companies Act, 2013, is a private entity with a paid-up capital not exceeding INR 4 crores and a turnover not exceeding INR 40 crores. However, certain entities, such as public companies, holding companies, subsidiary companies, and Section 8 companies, are not classified as small companies even if they meet these financial thresholds.
Q2. What are the benefits of being classified as a Small Company?
Ans. Small Companies enjoy several benefits, including exemptions from preparing cash flow statements, reduced compliance requirements, no mandatory auditor rotation, fewer board meetings, and lower penalties for non-compliance. These relaxations aim to reduce regulatory burdens and support business growth.
Q3. How has the Small Company definition changed in recent years?
Ans. The definition of a Small Company has been revised multiple times. Initially, the paid-up capital limit was INR 50 lakh, and the turnover limit was INR 2 crores. In 2021, these limits were increased to INR 2 crores and INR 20 crores, respectively. The latest amendment in 2022 further increased the limits to INR 4 crores for paid-up capital and INR 40 crores for turnover.
Q4. Can a Small Company be a holding or subsidiary company?
Ans. No, a holding company or a subsidiary company cannot be classified as a Small Company, even if it meets the financial criteria. The Companies Act, 2013, explicitly excludes such entities from this classification to ensure that companies with significant influence over other businesses do not benefit from the relaxed regulatory framework.
Q5. How does a Small Company differ from a Private Limited Company?
Ans. A Small Company is a subset of a Private Limited Company. While all Small Companies are Private Limited Companies, not all Private Limited Companies qualify as Small Companies. The key difference lies in the financial thresholds—a Small Company must have a paid-up capital of up to INR 4 crores and a turnover of up to INR 40 crores to qualify for Small Company benefits.
Q6. How can a company register as a Small Company in India?
Ans. There is no separate registration process for Small Companies. A business must be incorporated as a Private Limited Company under the Companies Act, 2013. If it meets the financial criteria of a Small Company, it automatically enjoys the associated compliance benefits. However, once it crosses the financial limits, it loses the Small Company status.
Q7. What happens if a Small Company exceeds the financial limits?
Ans. If a Small Company’s paid-up capital exceeds INR 4 crores or its turnover surpasses INR 40 crores, it no longer qualifies as a Small Company. As a result, it must comply with additional regulatory requirements, such as mandatory cash flow statement preparation, stricter audit requirements, and increased compliance obligations under the Companies Act.

The concept of a Small Company holds significant importance under the Companies Act, 2013. Recognizing the role of small businesses in driving economic growth, the Ministry of Corporate Affairs (MCA) introduced amendments to redefine small companies and provide them with various compliance relaxations. With the objective of reducing regulatory burdens, the Companies (Specification of Definitions Details) Amendment Rules, 2022, came into effect on September 15, 2022, thereby revising the criteria for classifying a company as a small company. These changes benefit private limited companies, particularly those contributing to employment generation and economic development in India.

What is a Small Company?

A Small Company is a private entity that operates on a smaller scale in terms of financial investment and revenue generation compared to larger corporations. The Companies Act, 2013, introduced the concept to support small businesses by easing certain compliance requirements, thereby fostering growth and sustainability. Unlike medium or large-scale businesses, a small company does not require a separate registration process. Instead, it is registered as a private limited company and is recognized as a small company based on its investment and turnover limits.

These companies form the backbone of the Indian economy, generating employment and contributing to innovation. Due to their limited financial size, they benefit from reduced compliance obligations, making it easier for them to operate efficiently. The small company definition ensures that such businesses receive appropriate legal recognition while enjoying simplified governance structures.

Revised Small Company Definition Under the Companies Act, 2013

According to Section 2(85) of the Companies Act, 2013, a company qualifies as a small company if it meets the following conditions:

1. The paid-up capital of the company should not exceed INR 4 crores or any higher amount as specified, but not exceeding INR 10 crores.

2. The turnover of the company should not exceed INR 40 crores or any higher amount as specified, but not exceeding INR 100 crores.

However, even if a company meets the above criteria, certain entities are not eligible to be classified as small companies. These include:

• Public Companies

• Holding Companies

• Subsidiary Companies

• Companies registered under Section 8 (not-for-profit entities)

• Companies governed by any special Act

The revised small company definition came into effect on September 15, 2022, replacing the earlier criteria where the maximum limits for paid-up share capital and turnover were INR 2 crores and INR 20 crores, respectively. The amendment significantly broadened the coverage, enabling more companies to benefit from the classification.

Comparison of the Old and New Small Company Definition

Over the years, the MCA has revised the small company definition multiple times to accommodate the changing business environment. Earlier, under the Companies (Specification of Definition Details) Amendment Rules, 2021, the threshold for paid-up capital was increased from INR 50 lakh to INR 2 crores, while the turnover limit was raised from INR 2 crores to INR 20 crores. The 2022 amendment further expanded these thresholds, increasing the maximum paid-up capital to INR 4 crores and the turnover limit to INR 40 crores.

These revisions reflect the government’s commitment to promoting small businesses by making them eligible for more exemptions and reduced compliance requirements. The changes ensure that businesses with relatively lower financial investments can still benefit from the regulatory relaxations offered under the Companies Act, 2013.

Key Benefits of the Revised Small Company Definition

The reclassification of small companies offers several advantages, making compliance less cumbersome. Small companies are exempted from preparing a cash flow statement as part of their financial statements, reducing the documentation burden. Additionally, they are allowed to file a simplified annual return, making the compliance process more streamlined.

One of the notable benefits includes the non-requirement of compulsory auditor rotation. Unlike larger corporations that must rotate auditors periodically, small companies can retain their auditors for an extended period, which helps maintain continuity and reduces compliance costs. Furthermore, auditors are not required to report on the adequacy of internal financial controls and their operational effectiveness in the auditor’s report.

Small companies also enjoy relaxed board meeting requirements, as they are only required to conduct two board meetings annually instead of the mandatory four meetings applicable to larger companies. The annual return of a small company can be signed either by a company secretary or, in the absence of one, by a director, offering flexibility in corporate governance.

Additionally, small companies face lesser penalties for non-compliance compared to other entities. This helps in reducing the financial risks associated with regulatory infractions, making it easier for small businesses to focus on growth rather than legal complications.

Characteristics of a Small Company in India

A small company in India is typically characterized by its limited operational scope and financial scale. These businesses operate with a simpler ownership and board structure, often with fewer shareholders and directors compared to larger firms. The regulatory framework ensures that small companies enjoy relaxed compliance obligations, making it easier for them to manage their business operations.

Most small companies have lower revenue and profit margins due to their smaller market reach. However, profitability is not solely dependent on revenue, as factors such as cost management and operational efficiency play a crucial role in determining financial success. Small companies generally employ fewer staff members, making them more bright in their decision-making processes.

Another defining characteristic of small companies is their limited geographic presence. Unlike large corporations with multiple branches or international operations, small businesses typically operate from a single location or within a restricted market area. This makes them more localized but also allows for a more personalized customer approach.

Registration Process for a Small Company in India

The registration process for a small company follows the same steps as that of a private limited company, One Person Company (OPC), or Limited Liability Partnership (LLP) under the Companies Act, 2013. The process begins with obtaining a Digital Signature Certificate (DSC) for all proposed directors. This is followed by name reservation through the MCA’s SPICe+ form, where a unique company name is submitted for approval.

Once the name is approved, the incorporation documents, including the Memorandum of Association (MOA) and Articles of Association (AOA), must be filed. These documents define the company’s objectives, rules, and management structure. After submitting the necessary affidavits, identity proofs, and address proofs, the Registrar of Companies (ROC) reviews the application. Upon successful verification, a Certificate of Incorporation is issued, marking the company’s official registration.

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

A small company is required to submit a Board’s Report that includes details such as the number of board meetings held, directors’ responsibility statements, and financial summaries. If the auditor identifies any frauds or adverse remarks, these must be disclosed in the report. Additionally, the report should highlight any material changes affecting business operations after the financial year-end and provide explanations for auditor qualifications.

Conclusion

The small company definition under the Companies Act, 2013, has evolved over time to accommodate the growing needs of businesses. With the 2022 amendment, the financial threshold for small companies has been significantly expanded, allowing more entities to benefit from reduced compliance obligations. These changes simplify business operations and encourage entrepreneurship and innovation in India. As small businesses continue to thrive, their role in generating employment and driving economic growth remains crucial in shaping the future of the Indian corporate model.

FAQs

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

Ans. A Small Company, as per Section 2(85) of the Companies Act, 2013, is a private entity with a paid-up capital not exceeding INR 4 crores and a turnover not exceeding INR 40 crores. However, certain entities, such as public companies, holding companies, subsidiary companies, and Section 8 companies, are not classified as small companies even if they meet these financial thresholds.

Q2. What are the benefits of being classified as a Small Company?

Ans. Small Companies enjoy several benefits, including exemptions from preparing cash flow statements, reduced compliance requirements, no mandatory auditor rotation, fewer board meetings, and lower penalties for non-compliance. These relaxations aim to reduce regulatory burdens and support business growth.

Q3. How has the Small Company definition changed in recent years?

Ans. The definition of a Small Company has been revised multiple times. Initially, the paid-up capital limit was INR 50 lakh, and the turnover limit was INR 2 crores. In 2021, these limits were increased to INR 2 crores and INR 20 crores, respectively. The latest amendment in 2022 further increased the limits to INR 4 crores for paid-up capital and INR 40 crores for turnover.

Q4. Can a Small Company be a holding or subsidiary company?

Ans. No, a holding company or a subsidiary company cannot be classified as a Small Company, even if it meets the financial criteria. The Companies Act, 2013, explicitly excludes such entities from this classification to ensure that companies with significant influence over other businesses do not benefit from the relaxed regulatory framework.

Q5. How does a Small Company differ from a Private Limited Company?

Ans. A Small Company is a subset of a Private Limited Company. While all Small Companies are Private Limited Companies, not all Private Limited Companies qualify as Small Companies. The key difference lies in the financial thresholds—a Small Company must have a paid-up capital of up to INR 4 crores and a turnover of up to INR 40 crores to qualify for Small Company benefits.

Q6. How can a company register as a Small Company in India?

Ans. There is no separate registration process for Small Companies. A business must be incorporated as a Private Limited Company under the Companies Act, 2013. If it meets the financial criteria of a Small Company, it automatically enjoys the associated compliance benefits. However, once it crosses the financial limits, it loses the Small Company status.

Q7. What happens if a Small Company exceeds the financial limits?

Ans. If a Small Company’s paid-up capital exceeds INR 4 crores or its turnover surpasses INR 40 crores, it no longer qualifies as a Small Company. As a result, it must comply with additional regulatory requirements, such as mandatory cash flow statement preparation, stricter audit requirements, and increased compliance obligations under the Companies Act.