Small company and its exemptions under Companies Act, 2013

Small company is a special status given to companies registered under Indian Companies Act, 2013 due to its scope of business, measured in terms of capital and turnover. The companies enjoying the status of small company enjoy certain benefits in form of exemption from applicability of provisions. To claim the status of the small company, it does not need to register a company in India; rather a company already registered and fulfilling provided conditions is known as a small company.

To know what a small company is, it is best to refer the definition from the Act itself. As per Companies Act, 2013, a Small company means a company, other than a public company, —

• paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and
• turnover of which, as per profit and loss account for the immediately preceding financial year, does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:

Provided that nothing in this clause shall apply to—

> a holding company or a subsidiary company;

> a company registered under section 8; or

> a company or body corporate governed by any special Act;

In the Act, it is stated that the company’s paid-up share capital should not exceed 50 lakh rupees and along with that the turnover of the company should not exceed 2 crore rupees. Both the criteria are necessary to be fulfilled for a company to fall into the category of small company.

With gradual growth of business, if company cross any of the thresholds provided, either for paid-up capital or turnover, the company must give up the status of the small company and the benefits granted for such companies.

It is upfront from the definition, that a small company cannot be a public company i.e., only a private company can claim the status of the small company. Further, even though a private company fulfills both criteria, but it is a holding company, a subsidiary company, section 8 company or any other company governed by any Special Act, it cannot be declared as a small company as the said provision does not apply to such companies.

What are the benefits to small companies?

The reason behind defining such company is to provide benefits to the company by considering its small size and to ensure it does not suffer consequences of provisions designed to regulate the large-scale companies. Instead of focusing on numerous compliance terms, it would rather focus on growing business.

• Meetings of the Board of Directors: A small company may hold only two board meetings in a year instead of fulfilling the requirement of four meeting for other companies. It has to make sure that at least one Board Meeting is held in each half of the calendar year and the gap between them is not less than ninety days.
• Financial Statement: Preparation or including cash flow statement as a part of its financial statement is not necessary for the small
• Annual return (Remuneration): Where other companies require providing details of remuneration to directors and key managerial personnel, small companies are required to provide details of the only aggregate amount of remuneration drawn by directors in its Annual Return.
• Signing of Annual Return: Annual Return of the company can be signed by the Company Secretary, or where in small company if there is no company secretary, by a single director of the company.
• Mandatory rotation of auditors as per Section 139(2) of the Companies Act, 2013: Small companies are exempted from the requirement from mandatory rotation of statutory auditor as per Section 139(2) of the Act, 2013 (read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014).
• Internal Financial Controls: A small company is not required to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report.
• Lesser penalties for Small Companies under Section 446B of the Companies Act, 2013 : If a small company fails to obey with the provisions of section 92(5), section 117(2) or section 137(3), such company and officer in default of such company shall be punishable with fine or imprisonment or both, as the case may be, which shall not be more than one-half of the fine or imprisonment or fine and imprisonment, as the case may be, of the minimum or maximum fine or imprisonment or fine and imprisonment, as the case may be, specified in such sections.

It can also be observed that the provisions from which a small company is exempted are those designed for large organizations for better management and administration. Following such provisions would be impractical for such small businesses and therefore they are exempted.

While summing up, it is to be noted that a small company is not registered specifically or recognized. A small company is formed due to the status it has obtained and based on the turnover and paid-up capital. A private limited company may be called a small company also, immediately after its incorporation subject to conditions provided above. The promoters and directors are mostly unaware of this special status and the benefits. Hence, it is necessary for them to be aware of such provisions to claim such beneficial position.

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