What is a Small Company in India?
A small company is one of the biggest boons to the economy, often existing in the form of private limited companies, partnership firms, or sole proprietorship entities, which typically have only a few employees and a lower turnover or profitability. It contributes to the process of generating profit, thereby boosting employment and serving as the backbone of the economy.
As per the new definition and threshold limits, companies with a paid-up capital of INR 2 crore or less, and a turnover of INR 20 crore or less are defined as small companies.
Section 2(85) – Small Company under Companies Act, 2013. The Companies Act of 2013 introduced a new concept of ‘small company’. It’s simply a Private Company with less capital and turnover size.
New Definition of a Small Company
Under the Companies Act 2013, section 2(85) defines the word small company and states the same as a company other than a public company, which has:
(i) Paid-up share capital not exceeding INR 50,00,000 or such higher amount as may be prescribed by the Government which shall not be more than INR 10 Crore, and
(ii) Turnover which does not exceed INR 2 Crore or such higher amount which may be prescribed by the Government, but shall not be more than INR 100 Crores, as per the profit and loss account pertaining to the immediately preceding financial year.
The Central Government vide Notification GSR 92(E) dated 01st February 2021 amended the Companies (Specification of Definitions Details) Rules, 2014 which came into force on 1st April 2021, by adding a new clause (t) in Rule 2(1);
“(t) For sub-clause (i) and sub-clause (ii) of clause (85) of section 2 of the Act, paid-up capital and turnover of the small company shall not exceed rupees two crores (INR 2 Crore) and rupees twenty crores (INR 20 Crore) respectively.”
So, as per this amendment to the Rules made by the Central Government:
(i) the paid-up share capital of a small company shall not exceed INR 2 Crore, and
(ii) The turnover of the small company shall not exceed INR 20 Crore during the immediately preceding financial year.
Along with the above-stated conditions pertaining to the paid-up share capital and turnover, for becoming a small company the following shall also be considered. A company shall not be regarded as a small company if it is:
(i) a public company,
(ii) a holding company or a subsidiary company,
(iii) a company registered under section 8 of the Companies Act,
(iv) a company or body corporate governed by any special act.
Comparison of the old and new definitions of a small business
The definition of a small corporation was expanded to include higher paid-up capital and increased turnover. To enable more enterprises to qualify as small companies under the Companies Act 2013, restrictions were raised. Below, we’ve provided a comparison of the old and new definitions of a small business.
| Particulars | Old Definition | New Definition |
| Paid-up share capital | Maximum paid-up share capital of Rs 2 lakh | Maximum paid-up share capital of Rs 4 crore |
| Turnover | Maximum turnover of Rs 20 crore | Maximum turnover of Rs 40 crore |
Characteristics of a Small Company
Some of the major characteristics of a small company can be understood as follows:
1. Low profitability and revenue:
Generally, a small company earns revenue and profit at a lower rate when compared with large or multinational entities. This mainly depends on the type of business they are involved in. But a lower revenue can never be considered as having lower profitability as for this type of business, the profit margin might be higher
2. Fewer employees:
Compared to a large company with multiple branches or business places, small companies will be having only a small human resource team with one person or a single team managing the business as it is small and easy to handle.
3. Smaller market area:
Small companies often serve a small market area or a specific segment of society, such as a convenience store or department store operating in rural townships. They have a small area for operating a business. They do not have to handle business outside of their state or country, as the activities are confined to a single location.
Advantages of a Small Company
There are certain advantages or pros which small company owners enjoy, and the same are listed below:
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Board Meetings
The Companies Act provides certain relaxations to OPCs, small companies, dormant companies, and private companies, whereby it states that such companies can hold one meeting in each half of the calendar year, which effectively constitutes two board meetings per year. The same applies to other companies, with a minimum of 4 per year.
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Annual Return
While filing the annual return of a small company, the same can be signed by a Company Secretary or a director of the small company. But in the case of any other private limited company which is not considered a small company, both the directors and the Company Secretary shall sign the annual return.
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Cash Flow Statement
A private limited company that is coming under the ambit of the small company shall not prepare or maintain a cash flow statement as a part of its financial statements. While the private limited company, which is not considered a small company, shall prepare a cash flow statement as part of its financial statements in a mandatory manner.
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Rotation of Auditors
Small companies are exempt from the requirement to rotate auditors every 5 to 10 years, unlike other private limited companies that are not considered small companies.
Flexibility, close relationship with customers, and lean staffing are again some of the greater points that make a small company attractive when compared with larger ones. This also helps business owners function in a close-knit manner with the community and its people.
Conclusion
A small business offers opportunities for entrepreneurship, employment, and job opportunities, and is much easier to run than a large corporation. The Companies Act states that small businesses cannot be considered public entities. Their paid-up share capital does not exceed Rs. 2 crores or a larger amount that is not more than Rs. 10 crores.
