9 Benefits of being a Small Company

In order to give smaller companies functioning as Private Limited Companies certain advantages, the idea of a small company was created in the Companies Act, 2013. Small companies are the backbone of any economy, thus it is important to make the process of starting and running one as straightforward as possible in order to increase jobs and the economy. As a result, the Companies Act, 2013’s designation of “small company” helps to promote small businesses in India. This essay will examine the Benefits of being a small business.

Small Company as defined by the Companies Act, 2013

Section 2(85) of the Companies Act, 2013 defines “Small Company” as follows:

• A small company is one that is not a public company:
  • Paid-up share capital of not more than fifty lakh rupees, or such greater amount as may be specified, but not more than five crore rupees;
  • Turnover of which, according to its most recent profit and loss statement, does not exceed two crore rupees or such greater number as may be specified, but not more than twenty crore rupees: However, nothing in this section shall apply to-
  • A Holding Company or a Subsidiary Company;
  • A Holding Company or a Subsidiary Company;
  • A Company or other legal entity controlled by a particular Act;

According to the Companies Act, 2013, a business may be classified as a “small company” if it fits one of the conditions (1) or (2) listed above. However, most businesses were classed as tiny since they met requirement one but exceeded the monetary limit in regard to the second condition excessively. As a result, the Ministry of Corporate Affairs altered “OR” at the end of requirement 1 to “AND” in an effort to prevent too many from being classed as a small company. On February 13, 2015, The Gazette of India released an update to the definition.

Small Company Characteristics

A small company has the following characteristics:

• Profitability and revenue are low: A small company generated less money than a medium or large business. Money is determined by the sort of business and its ability to earn revenue. However, lesser sales do not imply poorer corporate profitability.
• Fewer Workers: Smaller companies onboard a smaller team of workers than large businesses since they have less paid-up capital and turnover. Small businesses may even be managed by a single person or team.
• Market Size Reduction: Smaller companies, such as convenience stores in a rural township, serve the smaller segments of the community or society. As a result, they have a limited market area in which to conduct business.
• Less locations: Smaller companies often have a single location rather than several branches. They are often not formed in other nations or states. Small businesses’ sales are limited to a specific region.

Benefits for Small Companies

A Private Limited Company that qualifies as a small company has a variety of benefits under the Companies Act, 2013, as well as less compliance requirements. Some of the benefits include:

• Annual Return Filing: A Company Secretary or a Director of a private limited business can sign the annual return of a private limited company designated as a small company.
  A private limited company that is NOT categorized as a small company must have its annual return signed by both a Director and a Company Secretary.
• Board of Directors Meeting: A small company may get by with only two Board Meetings in a fiscal year.
  Private limited companies that are not classed as small are required to hold four Board Meetings in a fiscal year.
• Flow of Funds Statement: A cash flow statement is not required as part of the financial statement for a private limited business categorized as a small company.
  A cash flow statement must be prepared as part of the financial statement for every private limited company that is not classed as a small company.
• Auditors are rotated: Auditors must NOT be rotated in a private limited business designated as a small company. According to the Act, private limited companies that are not classed as small must rotate auditors every 5 or 10 years.

Benefits of being a Small Company

The Government revised the definition of Small Company in September 2022, raising the maximum threshold limit for payment of capital from INR 20 million to 40 million and the maximum turnover restriction from INR 200 million to 400 million. As a result, more and more businesses will fall under the purview of smaller companies, and their compliance burden will be greatly reduced.

• Exemption from the duty to prepare cash flow statements: If your company is small, you are not required to keep a cash flow statement as part of your financial statements.
• Exemption from the necessity to have at least four board meetings per year: Normally, a company is expected to hold at least four board meetings per year, with no more than 120 days between meetings. However, if your company is small, you can conduct at least two board meetings every year.
• Exemption from Caro 2020 application: CARO 2020 applies to all reports produced by Statutory Auditors on accounts audited by them throughout the year. However, if you are a Small Companies, you are free from the CARO 2020 obligation.
• Exemption from annual return certification by a company secretary in practice: Companies are required to have their annual returns certified by a company secretary in practice; however, if your company is small, the return can be signed by a company secretary or, if there is no company secretary, by a director of the company.
• Exemption from reporting on the adequacy and effectiveness of internal financial controls in the auditor’s report: According to the Companies Act, all companies’ auditors are expected to report if the company has an acceptable internal financial control system in place. If you are a Small Business, you are excluded from the necessity of reporting.
• Exemption from the requirement of mandatory auditor rotation: The Companies Act requires mandatory rotation of statutory auditors for listed companies as well as certain prescribed classes of companies; however, if you have a Small Company, you are exempt from the requirement of mandatory auditor rotation.
• Filing of annual return in Form MGT-7A: Smaller companies must file their annual returns in Form MGT-7A, whilst larger businesses must file their annual returns in Form MGT-7. MGT-7A is less thorough and requires less information than MGT-7. As a Small Company you get benefit from this as well.
• Smaller filing charge: The filing fee under the Companies Act is significantly cheaper for small businesses.
• Smaller penalties for defaults: Smaller penalties are imposed on small enterprises in the event of a violation as compared to listed and other companies.

Takeaway

As a consequence, we may infer that having a small company can provide significant advantages over larger organizations, resulting in a less time-consuming procedure and lower expenditures. However, it should be noted that a corporation that is entitled to be recognized as a small company in one year may not be eligible to have the status of a small company in the following year. This status is decided by the Annual return, which is filed at the conclusion of each fiscal year. If the organization no longer qualifies as a small business, the perks that come with that status are no longer available.

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