Small Company Under Companies Act, 2013

As one of the several measures of Ministry of Corporate Affairs towards Ease of Doing Business in India and to promote entrepreneurship, the concept of Small companies was introduced via Companies Act, 2013 (‘Act’). The basic premise behind this concept is to free small businesses from the burden of various financial and reporting compliances and provide a conducive environment for the growth of small players.

As per the Act, a Small company is a Private Company with:

a. Paid up capital not exceeding 4 crores AND

b. Turnover not exceeding 40 crores

The holding and subsidiary companies along with Section 8 Companies have been excluded from the purview of Small Company. Therefore, such companies cannot enjoy the benefits and relaxations provided to Small Companies with less revenue and manpower.

Since Small Companies are Private companies, there is no need for a separate registration under the law to obtain the status of Small Company.

Exemptions/Benefits available to Small Companies under Companies Act, 2013:

• No need of preparation of Cash Flow statements as part of Financial Statements
• Filing of Abridged Annual Return in place of detailed one
• No requirement to rotate Statutory Auditor’s every 5 years
• Holding minimum 2 Board meetings during a year in place of 4 meetings
• Free from mandatory requirement of converting its shares in dematerialised form
• No requirement to get the Annual Return signed by a Company Secretary in Practice; it can be signed by Company’s Company Secretary or Director
• One-half of the penalties for non-compliance as compared to other companies

The status of Small Company depends on the paid up capital and turnover of the Company as per the immediately preceding Financial Year, therefore, it can change as the Company starts growing. As soon as the amount of its paid up capital or turnover crosses the above-mentioned limits, the Company loses the perks and would have to comply with all the applicable provisions under the Act.

In conclusion, Small Companies are a boon for small business owners with less compliances under law. Though, Small Companies should keep a track of their paid up capital and turnover amounts at the end of each financial year in order to comply with the law.

Exclusions from Small Company Definition:

Holding and Subsidiary Companies: If a company is a subsidiary of another company or has subsidiaries, it does not qualify as a small company.

Section 8 Companies: Companies registered under Section 8 of the Companies Act, which are established for charitable purposes, are not eligible for small company classification.

Companies engaged in Financial Activities: Companies engaged in activities such as banking, financial services, insurance, or collective investment schemes are not considered small companies.

Statutory Auditor Appointment:

Rotation and Compliance Requirements: Small companies are not required to follow the mandatory rotation of auditors. However, they must ensure compliance
with the auditor appointment and reporting requirements.

Audit Committee Composition: Small companies are exempt from constituting an audit committee, but they must comply with the composition requirements if they have more than one director.

Transition from Small Company to Other Categories:

A. Change in Classification Criteria:

Increase in Paid-up Capital, Turnover, or Net Worth: If a small company crosses the prescribed limits of paid-up capital, turnover, or net worth, it ceases to be classified as a small company and becomes subject to the compliance obligations applicable to the new category.

Consequences and Compliance Obligations: Upon reclassification, the company must comply with the reporting, audit, and other requirements applicable to the new category.

B. Voluntary Upgradation:

Procedure and Legal Requirements: Small companies have the option to voluntarily upgrade their status by passing a special resolution and complying with the necessary legal requirements.

Advantages and Implications: Voluntary upgradation may provide access to additional resources, funding opportunities, and enhanced credibility, but it also entails increased compliance obligations and scrutiny.

Conclusion:

The small company provisions under the Companies Act, 2013, aim to provide relief to entrepreneurs by reducing compliance burdens and offering exemptions from certain provisions. Small companies enjoy benefits such as simplified financial reporting, flexible board meetings, and exemptions from audit committee requirements and related party transaction disclosures. However, small companies must fulfill their specific obligations regarding financial statements, board composition, loans to directors, and statutory auditor appointments. Timely compliance and a thorough understanding of the provisions are essential to maintain the small company status or transition to a different category as the business grows. Seeking professional advice can be instrumental in ensuring compliance and making informed decisions to maximize the advantages of being a small company under the Companies Act, 2013.