The Companies Act, 2013 (“Act”) introduced the concept of small companies in India. This was done to provide certain compliance relaxations to small businesses operating as private limited companies in India. As small businesses are the backbone of any growing economy, recognizing such private limited companies as small businesses goes a long way in promoting small businesses in India.
Small Company under the Act
Section 2 (85) of the Act defines a small company as under:
A small company means any company which is not a public company:
Before the Companies Amendment Act of 2015, it was sufficient to qualify as a small company if a private company qualified for one of the conditions mentioned above. However, after the amendment, the private company must qualify both the requirements stated in point nos to qualify as a small company. (i) and (ii) above.
Therefore, any private limited company whose paid-up capital is less than Rupees Fifty Lakhs and turnover do not exceed Rupees Two Crore can qualify as a small company under the Act.
However, the following shall not be considered as a small company:
1. A holding company or a subsidiary company;
2. A company registered under section 8; or
3. A company or body corporate governed by any special Act.
Benefits of qualifying as a small company under the Act
The following benefits are available to a small company under the Act:
Holding of Board Meetings:
A small company is only required to hold 2 (two) board meetings in a financial year, whereas a private limited company which is not a small company, is required to hold 4 (four) board meetings in a year.
Filing of Annual Reports:
The annual reports of a small company may be signed either by a director or by its company secretary. However, a private limited company that is not a small company must have its annual reports signed by both the director and the company secretary.
Preparation of a Cash-Flow Statement:
A small company is not required to prepare a cash flow statement as a part of its financial statement. However, a private limited company that is not a small company is mandatorily required to prepare such a cash flow statement.
Rotation of Auditors:
Auditors of a small company are not required to be rotated after every 5 (five) years or 10 (ten) years under the Act. However, a private limited company that is not a small company must rotate its auditors.
The benefits arising to qualify as a small company in India are numerous. Some are described above, and others like it help a growing business focus on its core business rather than being entangled with the statutory compliance required by a private limited company. Therefore, each start-up/ growing business must determine whether they fall under the definition of a small company under the Act and should benefit from such qualification, if applicable.