Concept of Small Companies under Companies Act, 2013

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Concept of Small Companies under Companies Act, 2013

The concept of “small company” has been first introduced by the Companies Act, 2013. The small company defines on the basics of the Capital invested and turnover of the company Small Companies means a company which are other than the public company and having low investment and also having special benefits and exemption under the Companies Act. Most of the exemptions provided to a small company are same as that provided to a One Person Company (OPC).

Table of Contents:

Meaning of Small Company as per Section 2(85)

Small company defines under the Section 2(85) of the Companies Act, 2013. It defines that small company means a company which is not a public company and if it fulfil both the criteria mentioned below:

  • Paid-up share capital should not exceed two crores rupees or such higher amount as may be prescribed i.e. not be more than 10 crore rupees and
  • turnover should not exceed twenty crore rupees or such higher amount as may be prescribed i.e. not be more than 100 crore rupees.

Provisions of Section 2 (85) The provisions of theSection 2(85) shall not apply to following companies even after they fulfils the above mentioned criteria and also not covered under the exemptions and benefits available to small  company.

  • Holding company /subsidiary company;
  • Section 8 Company; or
  • Company or body corporate ruled under any special Act
  • Public  Company

Which companies can be called as the Small Company?

As per the definition of Section 2 (85) of Companies Act, 2013 the companies which fulfils the following provisions can be called as the small company:

  • Company should be Private Limited
  • Paid Up capital should not be more than Rs. 2 Crore
  • Turnovers should not exceed more than Rs. 20 Crore

Characteristics of Small Company:

  • Small company requires less revenue as compare to the large corporate entity. But lower revenue does not consider as lower profitability.
  • Small Company requires lesser number of employees as compare to the large corporate entity.
  • Small Company needs only single location to operate its business so it can be easier to operate the business at one location without any several branches.
  • Small Company enjoys the benefits and exemptions which are not available to any other company such as Holding company, subsidiary company, charitable company and company governed by any Special Act.
  • A small company is required to hold only two meetings of the Board of directors
  • Small company does not require to prepare cash flow statement.
  • Private company can be falls under the criteria of small company.

Privileges /Exemptions Granted to Small Company 

  • Board Meetings: A small company is required to hold only two meetings of the Board of directors in the minimum gap of 90 days i.e. two meeting in each half of the calendar year. Thus small company is required to hold less meetings as compared to the other companies.
  • Signing of Annual Return: The annual return of a small company shall be signed by the company secretary, or if company secretary not appointed then the annual return can be signed by director of the company.
  • Abridged form of annual return in Form MGT-7A: The Central government specify the abridged form of annual return in Form MGT-7A in Companies (Amendment)Act,2017  which is effective from March 05, 2021. In accordance with the same small companies have to file annual returns from the Financial Year 2020-21 in Form No-MGT-7A.
    The Form No. MGT.9. is required to be attached or prepared from Financial Year 2020-21  the as the extract of the annual return with the Board’s Report has been omitted w.e.f. March 05, 2021. With respect to this The term Form  MGT-9” is removed from in the Companies Act, 2013. The Company have to place the copy of the annual return in Form MGT-7A on the website of the company, if any, and the web-link of such annual return shall be disclosed in the Board’s Report. But if the company does not have the website it is not required to attach the Extract of the Annual Return in the Board’s Report.
  • Requirement for appointment of Independent directors: A small company needs not to appoint independent directors.
  • Requirement of Cash Flow in Financial Statement: Small Company required to prepare financial statement and also get them signed from the directors of the company or by the company secretary of the company if any, and that financial statement includes the balance sheet, and the profit and loss account, but as per the provisions of the section 2(40) of Companies Act 2013 the company is not required to attach the cash flow statement in the part of financial statement.
  • Rotation of Auditor: Small company is exempt from the Provisions of section 139(2) of the Companies Act, 2013 regarding the rotation of auditor/maximum term of auditor being 5 years in case of an individual and 10 years in case of a firm of auditors.
  • Matters to be included in Board’s Report: The small company has to include the matters in Board’s report as mentioned in the Rule 8A of Companies (Accounts) Rules, 2014 and the provisions of Rule 8 of Companies (Accounts) Rules, 2014 for the matters to be included in the Board’s report is not applicable to the small company.
  • Requirement of Internal Financial Controls: A small company is exempt from the requirement of reporting in the auditor’s report the adequacy of the internal financial controls and its operating effectiveness.
  • Penal Provisions: If a small company fails to comply with the provisions of the companies act as applicable then such company and officer in default must be liable to a penalty which shall not be more than one half of the penalty specified in such sections.
  • Pre-Certification of MCA E-forms: As per Rule 8 (12) of Companies (The Registration offices and fees) Rules, 2014 the small companies are exempt from the pre-certification of E-from from the professionals i.e. CA/CS/CWA which are required to be filed by the companies to the Registrar of companies.

Mandatory Annual Compliances of Small Company 

  • Disclosures of interest by directors: As per section 184 (2) Every Director of Small Company in every financial year or whenever there is any change in the interest of  Directors must disclose his interest in other entities in the First Meeting of the Board of Directors in Form MBP-1.
  • Disclosures of Disqualification of Director: As per section 164 (2) every director of Small Company must inform to the company his disqualification before he is appointed or re-appointed in Form DIR-8 under sub-section (2) of section 164.
  • Board Meetings: A small company is required to hold only two meetings of the Board of directors in the minimum gap of 90 days i.e. two meeting in each half of the calendar year. Thus small company is required to hold less meetings as compared to the other companies
  • Annual Return: Every Small Company must file Its Annual Return in Form No. MGT-7A within 60 from the date of AGM.
  • Financial statements: Every Small Company must file its financial statement including Balance Sheet, Profit & Loss and other supporting Documents to the Registrar within 30 days of the date of AGM.
  • Boards’ Report: As per Section 134 of the companies Act, 2013, the small company has to prepared its Board’s report by including the matters as mentioned in the Rule 8A of Companies (Accounts) Rules, 2014. It must be signed by the Chairperson who is authorized by the Board and if not so authorized, by at least 2 directors one of which must be a managing director or by any director of the company.
  • Appointment of Auditor: Every small company must appoint the Auditor for a period of 5 years in the AGM by filing Form ADT-1 within 15 days of the AGM in which the auditor is appointed.
  • Register of Members: Every small Company must maintain the Statutory Registers as follows:
  • Register of Members,
  • Register of debenture-holders
  • Register of Shareholding of directors.
  • Resister of Charge

Conclusion

The small company registered under the Companies act having many exemptions as compared to the other companies and having lesser compliances. The companies which are falls under the small companies are required to meet the criteria on every year if it fails to meet the criteria in any specific year then the status of the small company may change in that year and the privileges and exemptions available to that company may withdrawn in the immediately preceding financial year and if the company again meet the criteria of capital and turnover as prescribed will automatically be covered under the category of “small company” and can avail the exemptions and privileges it is entitled to.

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Neelansh Gupta is a dedicated Lawyer and professional having flair for reading & writing to keep himself updated with the latest economical developments. In a short span of 2 years as a professional he has worked on projects related to Drafting, IPR & Corporate laws which have given him diversity in work and a chance to blend his subject knowledge with its real time implementation, thus enhancing his skills.

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