Small Company under Companies Act, 2013: Definition, Benefits, and Compliance Requirements

The Companies Act, 2013 introduced the concept of a Small Company to ease the compliance burden on smaller entities and promote the ease of doing business in India. This classification allows such companies to focus more on their growth and less on stringent legal formalities. However, the small companies are also registered as Private Limited Company. Below is the detailed insight into what constitutes a small company, its benefits, compliance requirements, and due dates.

Definition of a Small Company

According to Section 2(85) of the Companies Act, 2013, a Small Company, means a company, other than a public company  that satisfies the following conditions:

• Paid-up Share Capital: It does not exceed ₹4 crores

            AND

• Turnover: It does not exceed ₹40 crores as per the latest audited financial statements.

Following companies are exclusion to the definition of Small Companies

The following companies cannot be classified as Small Companies, even if they meet the above criteria:

• Public Companies
• Holding Companies
• Subsidiary Companies
• Companies registered under Section 8 (Non-profit Companies)
• Companies governed by any special Act.

Benefits of Small Company

1. Reduced Financial Disclosures
   • No requirement to prepare a cash flow statement.
   • Simplified format of the Board’s Report.
2. Lighter Compliance
   • Lower filing fees for annual returns and other forms.
   • Lesser penalties for non-compliance.
3. Convenient Board Meetings
   • Only two Board Meetings are mandatory in a financial year, with a minimum gap of 90 days.
4. Signing of Annual Return
   • In case of Small Company, the Annual Return can be signed by Company Secretary alone or if there is no CS, by a single Director only.
5. Cash Flow Statement not required
   • A Small company does not require to maintain a Cash flow statement as a part of its Financial Statements. So, while filing the Financial Statements with Registrar of Companies, companies shall not be required to attach the Cash Flow Statements along with the Financial Statements.
6. Reporting under CARO not Applicable
   • The reporting requirements laid down under the Companies (Auditor’s Report) Order, 2020 for matters to be included in an auditor’s report do not apply to a small company.
7. Abridged Director Report and Annual Return
   • For small companies, the format of director report is not vast rather an abridged Director Report shall also be sufficient. The format has already been prescribed by the Ministry for abridged Director Reports for Small Companies and One Persons Companies.
8. Fast Track Merger Process
   • The merger process between small companies is less cumbersome and less expensive and hence, done on a fast-track basis as compared to the other one.
9. Lesser Fees
   • Fees for filings and other formalities u/s. 403 of the Companies Act, 2013 is also comparatively lower for the small companies.
10. Lesser Penalties
    • Lesser penalties for Small Companies under Section 446B of the Companies Act, 2013: – If a small company fails to comply 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 liable to a penalty which shall not be more than one half of the penalty specified in such sections.

Key Compliances for Small Companies

Despite reduced compliance requirements, small companies must adhere to several essential statutory filings and regulations to maintain their good standing under the law.

1. Annual Compliance Requirements

2. Board Meetings
   • At least two Board Meetingsmust be held each year.
   • The meetings should have a gap of not less than 90 days.
3. Statutory Audit
   • Appointment of an auditor is mandatory for auditing financial statements
4. Director Disclosures
   • Directors must disclose their interests in Form MBP-1 at the first Board Meeting of the financial year or whenever there is a change.
5. Income Tax Compliance
   • Tax Audit: Applicable if the turnover exceeds ₹1 crore (or ₹10 crores for entities with digital transactions).
   • ITR Filing: Mandatory for all companies irrespective of turnover.

Other Important Forms for Small Companies

Relaxations for Small Companies

1. No CSR Requirements: Small Companies are exempted from Corporate Social Responsibility (CSR) obligations, which are mandatory for larger entities.
2. No Requirement of Internal Financial Controls (IFC): Small Companies are exempt from reporting on the adequacy of internal financial controls.

No Filing of Secretarial Audit Report: Unlike larger companies, small companies do not require a secretarial audit report.

Penalty for Non-Compliance

Small Companies are subject to relaxed penalties under Section 446B of the Companies Act, 2013. If a Small Company fails to comply with the provisions, the penalty amount is limited to 50% of the penalty applicable to other companies. Furthermore, the maximum penalty for directors or officers in default is capped at ₹2 lakhs, and for the company, it is capped at ₹1 lakh.

Recent Amendments Beneficial to Small Companies

1. Increased Turnover and Capital Limits: The definition of Small Company has been revised, increasing the limits of paid-up share capital and turnover (from ₹2 crores and ₹20 crores to ₹4 crores and ₹40 crores respectively).
2. Introduction of Form MGT-7A: A simplified annual return format exclusively for small companies.

Conclusion

The classification of a Small Company under the Companies Act, 2013, provides much-needed relief to smaller entities, enabling them to focus on growth, innovation and development. However, ensuring timely compliance is crucial to avoid penalties and maintain credibility.