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.

New Definition of Small Company as per Companies Act 2013

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

Definition of a Small Company: Facilitating Business Growth

The Finance Minister unveiled an updated definition of a small company during the presentation of the Union
Budget 2021. This revised definition took effect on April 1, 2021, with the aim of simplifying business
operations and alleviating compliance burdens for many enterprises. Also Read: Companies (Specification of
Definitions Details) Amendment Rules, 2021

Subsequently, the Ministry of Corporate Affairs (MCA) introduced further modifications to the definition of a
small company on September 15, 2022. This change was implemented through the Companies (Specification of
Definitions Details) Amendment Rules, 2022.

The refreshed definition of a small company is detailed in Section 2(85) of the Companies Act, 2013. According
to this definition, a small company is a non-public entity meeting the following criteria:

Paid-up Share Capital: It possesses a paid-up share capital equal to or below Rs. 4 crores or such higher
amount as specified, not exceeding Rs. 10 crores.
Turnover: The company maintains a turnover equal to or below Rs. 40 crores or such higher amount as
specified, not exceeding Rs. 100 crores.

However, the concept of small companies does not extend to certain types of firms, including holding or
subsidiary companies, those registered under section 8, and entities governed by special acts.

In India, most startups fall within the category of small companies, as they typically do not exceed a paid-up
capital of Rs. 10 crores or achieve annual sales turnovers of more than Rs. 20 crores.

Comparing the Old and New Definitions:

The amendment to the definition of a small company led to an increase in the maximum limits for paid-up
capital and turnover. These adjustments were made to encompass more companies within the ambit of a small
company, rendering them eligible for the benefits provided under the Companies Act 2013.

Here’s a comparison between the previous and current definitions of a small company:

Particulars Old Definition Criteria New Definition Criteria

Paid-up Share Maximum paid-up share capital of Rs. Maximum paid-up share capital of Rs.
Capital 2 lakh 4 crore
Turnover Maximum turnover of Rs. 20 crore Maximum turnover of Rs. 40 crore

These revisions aim to foster a more favorable environment for business growth and development while aligning
with the evolving needs of companies in India.

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.