State of the Small Companies According to the Companies Act, 2013

Small company has always existed in India right from its emergence. To help those smaller businesses, the Companies Act has been established in the year 2013 so that the small companies, which operated as private limited companies, can gain some advantages while competing with their larger counterparts.

Small companies are very important for the economy of a nation. They solve the crisis of unemployment and simultaneously help to develop the overall economic stance of the country. Hence it is very important that the small business need some extra boost to help them with their work. This includes assistance in beginning and looking after a company. To help promote the growth and development of the small businesses, a special classification called “small company” has been added in the Companies Act of 2013. This article will define the small companies as well detail about the benefits they can enjoy through this Act.

Definition of a Small Company according to the Companies Act, 2013

Small companies can be defined in the following way as per the updated section 2 (85) of the Companies Act of 2013.

A small company is a company which is different from a public business –
1. The paid up share capital which do not cross a limit of 50 lac rupees or equivalent high amount and which may have been recommended and should not be more than 5 Cr of rupees.
2. On the basis of the last loss and profit account, the turnover cannot cross the limit of 2 Cr rupees or equivalent high amount which may have recommended and should not be more than 20 Cr of rupees. The pre-condition is that nothing in that section can be applied to:
  - Any Subsidiary or any Holding company
  - Any company which has been registered in accordance with the Section 8
  - Any company or business body which is governed by some special Act.

Therefore, according to the 2013 Companies Act, if any business can fulfill any one condition from the above list, it can be considered to be a small company. But, it has been observed that a lot of the companies are getting classified as small just because they fulfill the first condition but exceeds the financial limits of the second condition. So, to solve the issue of having too many small companies, the word “OR” of the condition 1 has been altered to “AND” by the Ministry of the Corporate Affairs. This means that to be considered a smaller company, you need to fulfill both the conditions. The update in the definition has been declared in the Gazette of India on the 13^th of February of the year 2015. Hence, starting from that year, a small company is getting defined as mentioned above.

It is more likely for any start-up business to be considered a small company since most of the start-ups likely will have a paid up capital which is less than 50 lac rupees. It is also highly likely that their yearly sales turnover is less than the limit of 200 lac rupees. That is, the start-ups fulfill the two conditions given above which define a small business. To know more about the differences between a paid up capital and the authorized capital, take a look on the article “Authorized Capital of a Private Limited Company”.

Advantages for the Small Companies

The small companies are generally of the type “private limited company”. The smaller companies enjoy an array of benefits from the Act and has lesser formalities related to compliance. The list below describes some of the advantages.

Filing Yearly Return
1. The Director OR the Company Secretary of the private limited company can sign the yearly return of the private limited company if it is established as a small business
2. The Director AND the Company Secretary of the private limited company can sign the yearly return of the private limited company if it is NOT established as a small business
Board Meeting
1. It is enough for a small business to arrange just two Board Meetings in any financial year.
2. Minimum 4 Board Meetings are to be conducted by the private limited company if it is NOT established as a small business, in one single financial year.
Statement of Cash Flow
1. The private limited company if it is established as a small business do NOT have to prepare the statement of the cash flow in the financial statement.
2. The private limited company if it is NOT established as a small business must have to prepare the statement of the cash flow in the financial statement.
Rotation of the Auditors
1. The private limited company if it is established as a small business do NOT have to rotate the Auditors
2. The private limited company if it is NOT established as a small business must have to rotate the Auditors for every five or ten years according to the Act.