Key Relaxation to Small Companies- Introduction

Key Relaxation to Small Companies- Introduction

Small Company – Meaning and Explanation under Companies Act, 2013

The Finance Minister proposed a revised definition of a small company while presenting the Union Budget 2021. 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, 2021, to amend the old definition of a small company. The new definition proposed in the Budget 2021 is effective from 1 April 2021.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 2 crore or such a higher amount specified not exceeding more than 10 crores.
  •  A turnover equal to or below 20 crore or such a higher amount specified not exceeding more than 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.
  •  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 10 crores and an annual sales turnover of more than 20 crores.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 fewer amounts of investment and turnover.

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.

Most Startups will be Small Company. Since most of the startups will have a paid-up capital of fewer than 50 lakhs and also an annual sales turnover of less than 200 lakhs, they will be classified as a small company.

A small company is not registered specifically or recognized. A small company is formed due to the status it has obtained and based on the turnover and paid-up capital. A private limited company may be called a small company also, immediately after its incorporation subject to conditions provided above. The promoters and directors are mostly unaware of this special status and the benefits. Hence, it is necessary for them to be aware of such provisions to claim such beneficial position.

Small company is a special status given to companies registered under Indian Companies Act, 2013 due to its scope of business, measured in terms of capital and turnover. The companies enjoying the status of small company enjoy certain benefits in form of exemption from applicability of provisions. To claim the status of the small company, it does not need to register a company in India; rather a company already registered and fulfilling provided conditions is known as a small company.