What is a Small Company in India? A Detailed Guide
The idea of small firms was created by the Firms Act, 2013 (the "Act") to benefit small enterprises that operate as private limited companies. The yearly revenue of small businesses is lower than that of regular-sized businesses. Small businesses are essential to creating jobs and making money in a developing nation like India. They are hence the foundation of the economy. There is no distinct process for small businesses to register under the Act. It has a private limited corporation registration. However, the Act distinguishes a private company as a small business because of its lower turnover and investment levels. In this article, we will discuss the concept of a small company in India in detail.
Table of Contents
Small Company in India: New Definition
When introducing the Union Budget 2021, the finance minister suggested a new definition of a small business. The updated definition became operative on April 1, 2021. On September 15, 2022, the MCA made more changes to the definition of a small business. The updated definition was intended to make doing business easier and less complicated for many businesses. To change the previous definition of a small company, the Ministry of Corporate Affairs (MCA) published the Companies (Specification of Definitions Details) Amendment Rules, 2022. The revised definition will take effect on September 15, 2022. Section 2(85) of the Companies Act of 2013 provides the newly revised definition of a small business. According to the Act, a small business is one that is not publicly traded and possesses:
A minimum of Rs. 4 crores in paid-up share capital, or a larger sum that is stipulated as not to exceed Rs. 10 crores.
A revenue of at least Rs. 40 crores, or a larger sum that is stated as not to exceed Rs. 100 crores.
However, the following businesses are exempt from the small business concept:
A subsidiary or holding corporation.
A business that is registered under the Companies Act's Section 8.
A corporation or business that is subject to a particular act.
Since most Indian startups don't have paid-up capital exceeding Rs. 4 crores and an annual sales turnover exceeding Rs. 40 crores, they are categorised as small businesses.
Small Company in India: Old Definition
By raising the thresholds for paid-up capital from not exceeding Rs. 50 lakh to not exceeding Rs. 2 crores and turnover from not exceeding Rs 2 crore to not exceeding Rs. 20 crores, the Ministry of Corporate Affairs (MCA) previously updated the definition of small companies through the Companies (Specification of Definition details) Amendment Rules 2021. This most recent change to the definition of small enterprises has increased the limitations for paid-up capital from "not exceeding Rs. 2 crores" up to "not exceeding Rs. 4 crores”. At the same time, the revenue has been increased from "not exceeding Rs. 20 crores" up to "not exceeding Rs. 40 crores."
Small Company: New Definition vs. Old Definition
The maximum amount of paid-up capital and turnover was raised by the change to the definition of a small business. For more businesses to fall under the purview of small businesses and be eligible for the advantages that come with being a small business under the Companies Act of 2013, the restrictions were raised. The following table depicts the key differences between the old and new definitions of a small company:
Criteria | Old Definition | Old Definition 2021 | New Definition 2022 |
Paid-up share capital | Maximum of Rs.50 lakh | Maximum of Rs.2 Crores | Maximum of Rs.4 Crores |
Turnover | Maximum of Rs.2 crore | Maximum of Rs.20 Crores | Maximum of Rs.40 Crores |
Features of a Small Company
The traits of a small business are as follows:
Low Revenue and Profitability: The revenue of small businesses is lower than that of medium-sized and large businesses. The type of firm and its capacity to make money determine the revenue. Lower sales, however, do not equate to a company's decreased profitability.
Reduced Staff: Small businesses hire fewer people than major corporations because they have lower turnover and paid-up capital. Small businesses can occasionally be run by just one person or a single team.
Reduced Market Area: Convenience stores in rural townships are examples of tiny businesses that cater to the smaller segments of the community or society. They therefore have a limited market region in which to conduct business.
Fewer places: Small businesses typically have a single location rather than multiple branches. In several states and other nations, they are typically not found. Small business sales are limited to a specific region.
Benefits of a Small Company
Numerous advantages of the Companies Act of 2013 include an easing of regulatory requirements, which lessens the load on these businesses. The Act offers small businesses the following advantages:
Board Meetings: Small businesses are required to hold no more than two meetings throughout a fiscal year. In contrast, a private limited company that is not regarded as a small business is required to hold four board meetings throughout a fiscal year.
Annual Report: A small business's annual return filing can be signed by a director or the company secretary (CS). A director and a CS must sign the private limited company's annual return unless it is a tiny business.
Statement of Cash Flow: A cash flow statement is not required to be kept up to date as part of a small business's financial statement. On the other hand, a private limited company that does not fall within the small business category is required to provide a cash flow statement in its financial statement.
Rotation of Auditors: It is not necessary for a small business to rotate its auditors. However, according to the Act, a private limited company that isn't a small business must change its auditors every five to ten years.
Charges & Fees: Compared to other private or public corporations, small businesses are subject to less severe penalties under the Act. In comparison to other companies, it also offers lower fees for submitting forms to the ROC.
Short Forms: Directors' reports are not required to be filed by small businesses. The shortened directors' report must be filed. Since an abridged directors' report is not as comprehensive as the original, many of the clauses that are included in the original report may be left out. Likewise, small businesses are required to submit their yearly returns using Form MGT-7A. Medium and big businesses file Form MGT-7A, which is the condensed version of Form MGT-7. Additionally, a small business is exempt from writing a report for the annual general meeting. The paid-up capital and turnover limits of a small business, however, might cause its status to fluctuate annually. Upon exceeding the new definition's thresholds for either paid-up capital or turnover, a corporation will no longer be eligible for the benefits offered during a given fiscal year. The small business will no longer be labelled as such and will instead be regarded as a private limited corporation.
Steps to Register a Small Company in India
To register a small business in India under the Companies Act 2013, the procedures listed below are usually followed. For your small business, you can select the preferred business form, such as an LLP, OPC, or private limited company.
Step 1: Acquire Digital Signature Certificates (DSCs). To electronically submit paperwork on the Ministry of Corporate Affairs (MCA) website, all prospective directors and subscribers of the company must possess DSCs.
Step 2: Reserve the Company Name. To reserve a distinctive and suitable company name, submit Part-A of the SPICe+ form. After reviewing the application, the ROC will have 20 days to decide whether to accept or reject it.
Step 3: File the SPICe+ Form. Send in the SPICe+ form's Part-B and the following files:
Memorandum of Association (MOA): Describes the goals, authority, and extent of the business.
Articles of Association (AOA): Outlines the internal policies and procedures that control the administration and management of the business.
Professional Declaration: An affirmation from a certified expert attesting to adherence to all legal standards.
Affidavits: Statements from directors and subscribers attesting to the absence of any previous offences or convictions.
Identity and Address Proofs: Records attesting to the directors' and subscribers' identities and addresses.
Correspondence Address: A provisional address for correspondence prior to the establishment of the registered office.
Step 4: Pay fees and stamp duty. Send in the required stamp duty and fees for the MOA, AOA, and SPICe+ forms.
Step 5: Acquire a Certificate of Incorporation. After reviewing the filed paperwork, the ROC will provide a Certificate of Incorporation if all the requirements are met. This certificate acts as unmistakable evidence of the business's registration and existence.
Conclusion
Depending on its paid-up capital and turnover limits, a small business's classification can fluctuate annually. The benefits offered during a fiscal year will be eliminated the next year if a company surpasses the levels specified in the new definition (either for paid-up capital or turnover). The small business will no longer be considered a small business and will instead be regarded as a private limited corporation.
FAQ
Q1. What is the turnover limit for small companies?
According to recent changes made to the Companies (Specification of Definitions Details) Rules, 2022, the maximum amount for paid-up capital and turnover is now Rupees 4 Crores and Rupees 40 Crores, respectively. These cutoff points are essential indicators that distinguish small businesses from larger organisations.
Q2. Which companies are not considered small companies in India?
For a variety of reasons, not all businesses fall into the same category. Below is a list of some of these business categories.
A holding corporation or subsidiary.
Any business that has been registered as per section 8 of the company’s act.
A corporation or business that is subject to a special act.
Most Indian startups are classified as small businesses.
Q3. What is the paid-up capital of a small company?
According to the Companies Act, a small business is identified by certain paid-up capital requirements and turnover caps of Rs. 4 crores and Rs. 40 crores, respectively.
Q4. What is Section 2(85) of the Companies Act, 2013?
Section 2(85) of the Companies Act of 2013 provides a revised definition of a small business. According to the Act, a small business is not publicly traded and possesses:
A paid-up share capital of at least Rs 4 crores or a larger sum that is stated as not to exceed Rs 10 crores.
A turnover of at least 40 crores, or a large sum stated that does not exceed Rs 100 crores.
Q5. What is the turnover limit for small companies in India?
According to the Companies (Specification of Definitions Details) Rules, 2022, the maximum turnover for a small company is Rs. 40 crores.
Q6. What is the paid-up capital limit for small companies?
The maximum paid-up capital limit for small companies is Rs. 4 crores as per the Companies Act.
Q7. Which companies are excluded from being classified as small companies in India?
Companies that are subsidiaries, holding companies, registered under Section 8 of the Companies Act, or subject to a specific act are not considered small companies.
Q8. How does the definition of a small company differ under the old and new definitions?
The new definition, effective from 2022, increased the paid-up capital limit to Rs. 4 crores and the turnover limit to Rs. 40 crores, compared to the previous Rs. 2 crores and Rs. 20 crores.
Q9. What are the main features of a small company in India?
Small companies typically have low revenue, fewer employees, limited market reach, and a single business location.
Q10. What are the benefits of being classified as a small company in India?
Small companies enjoy relaxed compliance requirements, such as fewer board meetings, simplified financial statements, and lower fees for ROC filings.
Q11. Can a small company be listed on the stock exchange?
No, small companies are not publicly traded, as they are defined by their paid-up capital and turnover limits.
Q12. What is the process to register a small company in India?
Registering a small company involves acquiring a Digital Signature Certificate, reserving a company name, filing the SPICe+ form, paying fees, and obtaining a Certificate of Incorporation.
Q13. What documents are required to register a small company in India?
Required documents include the Memorandum and Articles of Association, professional declaration, affidavits, identity and address proofs, and a provisional address.
Q14. Are small companies required to hold regular board meetings?
Small companies are required to hold a maximum of two board meetings in a fiscal year, compared to four for other private companies.
Q15. Is a small company required to prepare a cash flow statement?
No, small companies are not required to maintain a cash flow statement, unlike other private companies.
Q16. What is the rotation requirement for auditors in small companies?
Small companies are exempt from the requirement to rotate their auditors, unlike other private companies which must rotate auditors every five to ten years.
Q17. What is the penalty for small companies in India?
Small companies are subject to less severe penalties under the Companies Act compared to larger corporations.
Q18. Do small companies have to file a detailed directors' report?
No, small companies are required to file a shortened version of the directors' report, which omits some of the clauses in the full report.
Q19. Can the status of a small company change during the year?
Yes, if a small company exceeds the paid-up capital or turnover limits, it will no longer be classified as a small company for the following fiscal year.
Q20. Is there a limit on the number of employees for small companies?
While there is no explicit employee limit, small companies typically have fewer employees compared to larger organizations.
Q21. Do small companies need to hold annual general meetings?
Small companies are not required to hold annual general meetings, unlike other private companies.
Q22. What is the significance of Section 2(85) in the Companies Act, 2013?
Section 2(85) provides the legal definition of a small company, detailing the eligibility criteria for paid-up capital and turnover.
Q23. Can a small company register as an LLP or OPC?
Yes, a small company can register as a Limited Liability Partnership (LLP) or One Person Company (OPC), depending on its preference.
Q24. How often do small companies need to file annual returns?
Small companies must file annual returns using Form MGT-7A, which is a simplified version of Form MGT-7 used by larger companies.
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