While the Companies Act, 2013 introduced many new concepts in the corporate world. “Small Company” was one of such, which gained a lot of attention of stakeholders and has continued till date. Let it be from the point of compliances under the Companies Act or any other Act, identifying whether the company comes within the ambit of “small company definition” plays a very crucial role. In this article, we will try to understand “Small Company” and how it impacts a company as a whole.
Amendment to the threshold limits of “Small Company”
MCA vide Notification G.S.R. 92(E) dated 1st February 2021 increased the threshold limits of “applicability criteria” i.e. paid-up capital and turnover for Small Company.
Amendment said amendment came into force with effect from 1st April 2021 and is notified by introducing Companies (Specification of Definitions Details) Amendment Rules, 2021.
Before amendment Section 2(85) of the Companies Act, 2013 was read as under:
“small company” means a company, other than a public company,—
(i) paid – up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees, and
(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees.
Provided that nothing in this clause shall apply to—
- A holding company or a subsidiary company;
- A company registered under section 8; or
- A company or body corporate governed by any special Act;
The said amendment has increased the threshold of paid-up capital and turnover and shall be read as under:
paid-up share capital of which does not exceed Rs. 2 crores (Two crore rupees) or such higher amount as may be prescribed which shall not be more than ten crore rupees and
turnover of which as per profit and loss account for the immediately preceding financial year does not exceed Rs. 20 crore (Twenty crore rupees) or such higher amount as may be prescribed which shall not be more than one hundred crore rupees.”
Definition of Small Company
Section 2, Clause (85) of the Companies Act, 2013 provide criteria of paid-up capital and turnover and companies fulfilling those come under the purview of the definition of Small Company.
A Small Company means a company, other than public company, whose
(i) paid-up share capital does not exceed Rs. 2 crore or such higher capital as prescribed which shall not be more than Rs. 10 crore
(ii) turnover as per profit and loss account for the immediately preceding financial year does not exceed Rs. 20 crore or such higher capital as may be prescribed which shall not be more than Rs. 100 crore.
Provided that noting in this clause shall apply to:
- A holding company or subsidiary company;
- A company registered under Section 8 or
- A company or body corporate governed by any Special Act.
From the above definition now it is clear that,
- A Public Limited or Listed company are out of the purview of the definition of a Small Company.
- The exclusion part of the definition specifically denotes, Companies Registered under Section 8 of the Companies Act, 2013 (NonProfit Companies), any company or body corporate incorporated under any Special Act of Central or State Government and any company having holding or subsidiary company does not fit into the definition of a small company.
Is it mandatory to fulfil both threshold limits of paid-up capital and turnover for a company to be a “Small Company?
Yes, both the conditions i.e. Paid-up capital not exceeding Rs. 2 crores and Turnover in the immediately preceding financial year not exceeding Rs. 20 crores, should be fulfilled simultaneously. The definition of “Small Company” includes AND between both the conditions and hence it is important to fulfil both the conditions.
Therefore, if the limit under anyone conditions is crossed, the company loses the privilege of being a “Small Company”.
So, is a small company a private company?
Yes, small companies are private limited companies incorporated under the Companies Act, and whose turnover as per immediately preceding financial year does not exceed Rs. 20 crores and paid-up share capital does not exceed the threshold of Rs. 2 crores.
Is One Person Company a “Small Company”?
Yes, One Person company is considered as small company.
How to check whether the company is a small company or not?
Section 2(85) of the Companies Act, 2013 provides two criteria to verify whether a company comes within the purview of the small company definition:
- Paid up share capital of the company does not exceed Rs. 2 crore and
- Turnover of the immediately preceding financial year does not exceed Rs. 20 crores
So fulfilling both the conditions simultaneously is a must. For example:
Example 1: Where a company is fulfilling both the conditions
A Pvt. Ltd. is having paid up share capital of Rs. 1.5 crore and Turnover as per profit and loss statement as on 31/03/2021 is Rs. 1 crore.
In the above example, the company is fulfilling both the conditions i.e. its paid up share capital is less than Rs 2 crore and turnover is less than Rs. 20 crore as on 31/03/2021, therefore the company will enjoy the status of being small company for the financial year 2021-22.
Example 2: Where company is fulfilling one of the criteria
Paid up share capital of A Ltd. is Rs. 1.5 crore, turnover as on 31/03/2021 is Rs. 25 crore.
In this case, A Ltd. will not be considered as small company for the financial year 2021-22, as its turnover as on 31/03/2021 i.e. immediately preceding financial year exceeds Rs. 20 crore.
Advantages to Small Company under Companies Act, 2013
Under Companies Act, 2013, small companies enjoy relatively less compliance burden compared to normal private limited companies.
A small company need not hold 4 board meetings, Section 173 (5)of the Act, permit small companies to hold atleast one meeting of Board of Directors in each half of a calendar year with a gap between two board meetings being not less than 90 days.
Signing of Annual Return
As per Proviso to Section 90(1) Annual Return of a small company can be signed by a company secretary if the company has so appointed or by the Director of the Company.
In the case of other normal private limited companies, the Annual Return must be signed by the Director and Company Secretary if the company has so appointed or by the Company Secretary in practice.
Cash Flow Statement
As per Proviso to Section 2(40) of the Companies Act, 2013, Financial Statements of small company may not include Cash Flow Statement.
From the above, it is clear that it is not mandatory for small companies to include Cash Flow Statement in their Financial statements.
Lesser penalties for small companies
Section 446B of the Companies Act, 2013 provides for lesser penalties in case of default by small companies. In case of default, the penalty shall not be more than onehalf of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.
No need to report internal financial control
Section 143(3) clause (i) regarding reporting of internal financial control and the operating efficiency does not apply to small company.
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