UNDERSTANDING SMALL COMPANY DEFINITION UNDER

COMPANIES ACT 2013

AUTHOR :RUCHI GANDHI

https://taxguru.in/company-law/small-company-definition-companies-act-2013.html

Small businesses serve as the backbone of the economy, particularly in developing countries like India. These
enterprises operate as private limited companies and enjoy exemptions and benefits as per the Companies Act
2013. This article delves into the criteria that define a small company under this act and the changes in the
definition over time.

What is a Small Company?

The Companies Act 2013 created the concept of small companies to provide benefits to small enterprises that
operate as private limited companies. Small businesses generate less money per year than larger businesses. But
these small businesses have an important role in generating profits and increasing employment in developing
countries such as India. As a result, they serve as the backbone of the economy.

To be registered under the Companies Act, small companies do not have to follow any separate procedure. In
fact, a small company is registered as a private limited company. However, the law differentiates a private
limited company from a small company based on its less amount of investment and turnover.

Definition of Small Company as per Companies Act 2013

A small company is defined under Section 2(85) of the Companies Act 2013. It is a private limited company
whose paid-up share capital and turnover are within the limits specified by Government.

For the ease of doing business, Rule 2(1)(t) of the Companies (Specification of Definitions Details) Amendment
Rules, 2021 dated 01.02.2021 has amended the definition of a small company with effect from 1st April 2021.

Hence, from the financial year 2021-22, the threshold limits for determining the ambit of small companies
have been enhanced.

Earlier, the threshold limit of paid-up share capital was Rs. 50 lacs that has been increased to Rs. 2 crores and the
limit of turnover was Rs. 2 crores that has been increased to Rs. 20 crores.

Therefore, the definition of Small Company under Section 2(85) read with Rule 2(1)(t) of the Companies
(Specification of Definitions Details) Rules, 2014, to be effective from 1st April 2021 is as under:

A ‘small company’ is defined as a company, other than a public company whose paid-up share capital does not
exceed Rs. 2 crores or such higher prescribed amount which shall not be more than Rs. 10 crores, and whose
turnover of the preceding financial year does not exceed Rs. 20 crores or such higher prescribed amount which
shall not be more than Rs. 100 crores.

Breaking down the definition

A small company is a private limited company that satisfies both the following conditions:

1. Paid-up share capital does not exceed Rs. 2 crores or such higher prescribed amount which shall not be
more than Rs. 10 crores, and

2. Turnover of the preceding financial year does not exceed Rs. 20 crores or such higher prescribed
amount which shall not be more than Rs. 100 crores.

Remember, this definition has to be made applicable for the financial year 2021-22 onwards. For previous
financial years, the status of small companies must be assessed with reference to previous paid-up share capital
and turnover limits of Rs. 50 lacs and Rs. 2 crores respectively.

Exceptions:

The above definition of a small company is not applicable to the following (i.e., a small company cannot be the
below ones):

A public company
A holding company or a subsidiary company
A company registered under Section 8
A company or body corporate that is governed by any Special Act

Thus, even though the above-mentioned companies satisfy the capital and turnover requirements, they would
nevertheless fall beyond the purview of ‘Small Company’ and, consequently, the advantages applicable to a
small company cannot be extended to them.

Conclusion

The Companies Act 2013 offers a specific definition of what constitutes a small company, mainly to provide
exemptions and privileges to such enterprises. This definition, although stringent, opens doors for small
companies to operate with fewer compliances and with a greater focus on business development. As the
economy evolves, so does the definition, keeping in view the changing landscape of business needs and
operations. Understanding these criteria is essential for businesses to make the most of the advantages provided
by the Act.