At Suvit, we're all about helping Indian businesses navigate the complexities of the financial world, and understanding how regulations impact your day-to-day operations is key.
One area we often get questions about is the "small company" status under the Companies Act, 2013. So, what exactly is a small company, and how can it benefit your business?
Let’s break it down.
What Is a "Small Company"?
The term "small company" might sound simple, but it comes with specific criteria under the Companies Act, 2013. According to Section 2(85) of the Act, a company qualifies as a small company if it:
- Has a paid-up share capital of up to ₹4 crore (or a higher amount, capped at ₹10 crore).
- Has an annual turnover of up to ₹40 crore (or a higher amount, capped at ₹100 crore).
But here's the catch—not every company that meets these criteria qualifies. The following companies are excluded:
- Holding or subsidiary companies.
- Companies registered under Section 8 (non-profit). -Companies governed by any special Act.
Why Does Being a Small Company Matter?
Now that you know the definition, let’s dive into why this status can be a game-changer for your business.
Fewer Compliance Headaches
One of the biggest perks of being classified as a small company is the reduced compliance burden. Small companies are exempt from preparing cash flow statements, appointing independent directors, and forming audit committees, among other requirements. That means fewer forms, less paperwork, and lower costs for you.
Lower Corporate Tax Rate
Small companies enjoy a lower corporate tax rate of 25%, compared to the usual 30% for other companies. This reduction can significantly boost your bottom line, allowing you to reinvest more into your business.
Easier Access to Loans and Credit
The government and financial institutions provide numerous schemes to support the growth of small and medium enterprises (SMEs). These include access to collateral-free loans, priority sector lending, subsidies, and grants, making it easier for small companies to get the financial backing they need.
Also Read: GST Rules for Small Businesses and Start-ups in India
But What Are the Challenges?
While being a small company offers significant advantages, it’s not without its limitations.
Limited Growth Potential
To retain small company status, you have to keep your paid-up share capital and turnover within the specified limits. This can restrict your ability to scale, making it harder to expand into new markets or increase your market share.
Losing Small Company Status
If your company grows beyond the prescribed thresholds in any financial year, you lose your small company status—and the benefits that come with it. Once you cross those limits, you’re subject to the regular compliance and tax obligations of larger companies.
Lack of Market Recognition
Small companies often struggle with brand recognition. You may find that suppliers, customers, and even investors prefer to work with more established companies, impacting your growth and competitiveness.
How to Register a Company under the Companies Act 2013
If you’re planning to register your business under the Companies Act, here’s a quick guide to the process:
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Get a Digital Signature Certificate (DSC): You’ll need this for all directors and subscribers to file forms on the MCA (Ministry of Corporate Affairs) website.
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Reserve a Company Name: Use the SPICe+ form on the MCA site to secure your company name. The Registrar of Companies (ROC) will approve or reject your name within 20 days.
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File the Incorporation Forms: Along with the SPICe+ form, you'll need to submit the Memorandum of Association (MOA), Articles of Association (AOA), identity proofs, and a few declarations to complete your registration.
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Receive the Certificate of Incorporation: Once all documents are verified, the ROC will issue your Certificate of Incorporation, marking your business officially registered.
The Evolution of "Small Company" Definition
The definition of a small company has evolved over time. Initially, the paid-up share capital and turnover limits were much lower, but recent changes have broadened the criteria to include more companies.
This means more businesses can now benefit from the simplified compliance regime.
| Year | Paid-up Share Capital | Turnover |
|---|---|---|
| 2013 | Not exceeding Rs. 50 lakhs | Not exceeding Rs. 2 crores |
| 2021 | Not exceeding Rs. 2 crores | Not exceeding Rs. 20 crores |
| 2022 | Not exceeding Rs. 4 crores | Not exceeding Rs. 40 crores |
Also Read: Four Silent Killers in Your Accounting: What to Watch Out For
Watch Your Step!
Understanding the definition and changes related to the small company status is important for business owners in India.
While it offers benefits like lower tax rates and compliance relief, it also brings challenges such as limitations on growth and the risk of losing your small company status.
At Suvit, we believe staying updated on regulatory changes like these is key to sustainable growth.
Whether you’re just starting out or looking to expand, knowing where you stand in the regulatory landscape helps you make better financial decisions.
