Understanding Small Company Definition under Companies Act 2013

Small businesses serve as the backbone of the economy, particularly in developing countries like India. These enterprises operate as private limited companies and enjoy exemptions and benefits as per the Companies Act 2013. This article delves into the criteria that define a small company under this act and the changes in the definition over time.

What is a Small Company?

The Companies Act 2013 created the concept of small companies to provide benefits to small enterprises that operate as private limited companies. Small businesses generate less money per year than larger businesses. But these small businesses have an important role in generating profits and increasing employment in developing countries such as India. As a result, they serve as the backbone of the economy.

To be registered under the Companies Act, small companies do not have to follow any separate procedure. In fact, a small company is registered as a private limited company. However, the law differentiates a private limited company from a small company based on its less amount of investment and turnover.

New Definition of Small Company as per Companies Act 2013

For the ease of doing business, Rule 2(1)(t) of the  dated 01.02.2021 has amended the definition of a small company with effect from 1^st April 2021.

Definition of a Small Company: Facilitating Business Growth

The Finance Minister unveiled an updated definition of a small company during the presentation of the Union Budget 2021. This revised definition took effect on April 1, 2021, with the aim of simplifying business operations and alleviating compliance burdens for many enterprises. Also Read: Companies (Specification of Definitions Details) Amendment Rules, 2021

Subsequently, the Ministry of Corporate Affairs (MCA) introduced further modifications to the definition of a small company on September 15, 2022. This change was implemented through the Companies (Specification of Definitions Details) Amendment Rules, 2022.

The refreshed definition of a small company is detailed in Section 2(85) of the Companies Act, 2013. According to this definition, a small company is a non-public entity meeting the following criteria:

• Paid-up Share Capital: It possesses a paid-up share capital equal to or below Rs. 4 crores or such higher amount as specified, not exceeding Rs. 10 crores.
• Turnover: The company maintains a turnover equal to or below Rs. 40 crores or such higher amount as specified, not exceeding Rs. 100 crores.

However, the concept of small companies does not extend to certain types of firms, including holding or subsidiary companies, those registered under section 8, and entities governed by special acts.

In India, most startups fall within the category of small companies, as they typically do not exceed a paid-up capital of Rs. 10 crores or achieve annual sales turnovers of more than Rs. 20 crores.

Comparing the Old and New Definitions:

The amendment to the definition of a small company led to an increase in the maximum limits for paid-up capital and turnover. These adjustments were made to encompass more companies within the ambit of a small company, rendering them eligible for the benefits provided under the Companies Act 2013.

Here’s a comparison between the previous and current definitions of a small company:

These revisions aim to foster a more favorable environment for business growth and development while aligning with the evolving needs of companies in India.

Exceptions:

The above definition of a small company is not applicable to the following (i.e., a small company cannot be the below ones):

• A public company
• A holding company or a subsidiary company
• A company registered under Section 8
• A company or body corporate that is governed by any Special Act

Thus, even though the above-mentioned companies satisfy the capital and turnover requirements, they would nevertheless fall beyond the purview of ‘Small Company’ and, consequently, the advantages applicable to a small company cannot be extended to them.

Conclusion

The Companies Act 2013 offers a specific definition of what constitutes a small company, mainly to provide exemptions and privileges to such enterprises. This definition, although stringent, opens doors for small companies to operate with fewer compliances and with a greater focus on business development. As the economy evolves, so does the definition, keeping in view the changing landscape of business needs and operations. Understanding these criteria is essential for businesses to make the most of the advantages provided by the Act.