Small Company – Meaning and Explanation under Companies Act, 2013

Small Company – Meaning and Explanation under Companies Act, 2013

Small business is one of the biggest boons to the economy and this often exists in the form of private limited companies, partnership firms, or sole proprietorship entities which will be having only a few numbers of employees and the turnover or profitability will also below. It contributes to the process of generating profit so as to boost employment making it 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 turnover of INR 20 crore or less come are defined as small companies.
Section 2(85) – Small Company under Companies Act, 2013. The Companies Act, 2013 introduced a new concept of ‘small company’. Its simply a Private Company but with less capital and turnover size.

Small Company as per Companies Act, 2013

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) dates 01^st February 2021 amended the Companies (Specification of Definitions Details) Rules, 2014 which came into force on 1^st day of April 2021 by adding a new clause (t) in Rule 2(1);
“(t) For the purposes of 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 considered 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.

Characteristics of 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 lower when compared with large or multinational entities. This majorly 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 small section of the society like a convenience store or department store functioning in rural township. They have small area for operating business. They do not have to handle business out of states or countries as the activities are confined to a single area.

Advantages of owning Small Company

There are certain advantages or pros which are enjoyed by small company owners and the same are listed below:

1. Board Meetings

The Companies Act provides certain relaxation to OPC, 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 makes the same to 2 board meetings in a year. The same in the case of other companies shall be a minimum of 4 during a year.

2. 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 case of any other private limited company which is not considered as a small company, both director, Company Secretary shall sign annual return.

3. 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 their financial statements. While the private limited company which is not considered as a small company shall prepare a cash flow statement as part of their financial statements in a mandatory manner.

4. Rotation of Auditors

The small companies need not comply with the rotation of auditors every 5 to 10 years like the other private limited companies which are not considered as small company.
Flexibility, close relationship with customers, and lean staffing are again some of the greater points which make a small company attractive when compared with larger ones. This also helps the business owners’ function in a close-knit manner with the community and the people of the same.