Tally Automation
Feb 2, 2024

Small Company as Per Companies Act, 2013

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Raja Ray

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If you are a business owner or an entrepreneur in India, you may have heard of the term "small company" under the Companies Act 2013. But what exactly does it mean and why does it matter?

In this blog, we will try to answer these questions and explain the benefits and challenges of being a small company in India.

Definition of a Small Company

According to Section 2 (85) of the Companies Act 2013, a small company is a company that is not a public company and has:

  • A paid-up share capital equal to or below Rs.4 crore or such a higher amount specified not exceeding more than Rs.10 crores.
  • A turnover equal to or below Rs.40 crore or such a higher amount specified not exceeding more than Rs.100 crores.

But, the following types of companies are not considered as small companies, even if they meet the above criteria:

  • A holding company or a subsidiary company.
  • A company registered under Section 8 (non-profit company).
  • A company or body corporate governed by any special Act.

Benefits of Being a Small Company

Being a small company has some advantages over being a regular company, such as:

Reduced Compliance Burden

A small company is exempted from certain provisions of the Companies Act 2013, such as preparing cash flow statements, appointing independent directors, constituting audit committees, etc. This reduces the cost and time involved in complying with the law.

Lower Tax Rate

A small company is eligible for a lower corporate tax rate of 25% (plus surcharge and cess) as compared to the normal rate of 30% (plus surcharge and cess) for other companies. This can help in saving tax and increasing profits.

Easier Access to Credit

A small company can avail of various schemes and incentives offered by the government and financial institutions for promoting the growth and development of small and medium enterprises (SMEs). These include priority sector lending, collateral-free loans, subsidies, grants, etc.

Challenges of Being a Small Company

Being a small company also has some drawbacks and limitations, such as:

Limited Scope of Expansion

A small company has to maintain its size within the prescribed limits to retain its status as a small company. This may restrict its ability to grow and scale up its operations and market share.

Higher Risk of Losing Status

A small company may lose its status as a small company if it exceeds the specified thresholds of paid-up share capital or turnover in any financial year. This may result in losing the benefits and privileges of being a small company and facing increased compliance and tax obligations.

Lack of Awareness and Recognition

A small company may not be well-known or recognized by the customers, suppliers, investors, and other stakeholders as compared to a larger or more established company. This may affect its reputation, credibility, and competitiveness in the market.

Also Read: GST Rules for Small Businesses and Start-ups in India

How to Register a Company under the Companies Act 2013

If you want to register a company under the Companies Act 2013, you need to follow these steps:

Step 1: Obtain a Digital Signature Certificate (DSC) for all the proposed directors and subscribers of the company. A DSC is required to file forms on the Ministry of Corporate Affairs (MCA) website.

Step 2: Apply for reservation of the company name in Part-A of the SPICe+ form on the MCA website. The company name should be unique, relevant, and not prohibited by the law. The Registrar of Companies (ROC) will either approve or reject the name within 20 days.

Step 3: File the SPICe+ form in Part-B on the MCA website along with the following documents:

Step 3.1: The Memorandum of Association (MOA) and Articles of Association (AOA) of the company. The MOA defines the objectives and scope of the company, while the AOA lays down the rules and regulations for its management and administration.

Step 3.2: A declaration by a professional (such as a chartered accountant, company secretary, advocate, or cost accountant) regarding compliance with all the requirements and rules of the Act.

Step 3.3: An affidavit by each subscriber and director stating that they have not been convicted of any offense, found guilty of fraud or breached any duty to any company in the last five years.

Step 3.4: A proof of identity and address for each subscriber and director. If the subscriber is a body corporate, then the prescribed documents need to be provided.

Step 3.5: An address for correspondence until the registered office is set up.

Step 4: Pay the prescribed fees and stamp duty for the SPICe+ form and the MOA and AOA.

Step 5: The ROC will verify the SPICe+ form and the attached documents and issue a Certificate of Incorporation if everything is in order. The Certificate of Incorporation is the conclusive proof of the existence and registration of the company.

Comparison of Old and New Definitions of Small Company

The concept of a small company was introduced by the Companies Act 2013 to provide benefits and exemptions to small enterprises that operate as private limited companies. The definition of a small company has been revised twice since then, once in 2021 and again in 2022, to increase the threshold limits of paid-up share capital and turnover.

These revisions aimed to include more companies within the ambit of a small company and to ease their compliance burden and tax liability.

The following table shows the comparison of the old and new definitions of a small company under the Companies Act 2013:

YearPaid-up Share CapitalTurnover
2013Not exceeding Rs. 50 lakhsNot exceeding Rs. 2 crores
2021Not exceeding Rs. 2 croresNot exceeding Rs. 20 crores
2022Not exceeding Rs. 4 croresNot exceeding Rs. 40 crores

Watch your Step

Understanding the "small company" definition and its changes is essential for Indian business owners. With this status, one can enjoy lower compliance and tax benefits, but one also has to face challenges like limited growth and possible loss of status.

The registration process involves obtaining Digital Signature Certificates and navigating specific forms on the Ministry of Corporate Affairs website. Recent revisions to the small company definition signify the government's push to ease compliance for more enterprises.

Ultimately, choosing small company status demands a careful evaluation of pros and cons. In a dynamic Indian market, staying abreast of regulatory changes is key for small companies eyeing sustainable growth.

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