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Small Company under Companies Act 2013

Nimish.A.Chodankar 
on 23 September 2014

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SMALL COMPANY UNDER COMPANIES ACT 2013

There is a school of thought that very rightly laments “The Companies Act 2013 threads small aadmi and his companies with jack boots.”

Introduction

It’s rightly said Small businesses are vital to the success of the economy. Not only as they provide the success stories of the future, but also because they meet local, they serve the requirement of larger business. The concept of “Small Company” has been introduced for the first time by the Companies Act, 2013. The Act identifies some companies as small companies based on their capital and turnover position for the purpose of providing certain relief/exemptions to these companies. Most UK businesses today are small. Nearly 90% employ less than 6 people. 

Small Companies are well placed to build personal relationships with customers, employees, and suppliers. With a small Company you know who you are dealing with; you can 'put a face' to the person you are in contact with. Person-to-person interaction is as important as ever in building strong relationships. Small Companies are well positioned to introduce and develop new ideas. Due to the small scale of operation, small Companies have lower overhead costs as compare to companies other than small company.

Small company tag is much beneficial to small entrepreneurs aiming at to rotate business at a quite fare level and operate within the limits specified under Section 2(85) of Companies Act 2013.

What is a Small Business?

Small businesses are in general sense privately owned corporations, partnerships,or sole proprietorships. Definitions of Small Business are in accordance with terms of government support and tax policy varies depending on the country and industry. Small businesses are common in many countries, depending on the economic system in operation. Small businesses range from 15 employees under the Australian Fair Work Act 2009, 50 employees according to the definition used by the European Union, and fewer than 500 employees to qualify for many U.S. Small Business Administration programs. Small businesses can also be classified according to other methods such as sales, assets, or net profits.

Advantages of small business

  • A big business can only be started at a very high cost and on a full-time basis.
  • Small business is well suited to internet marketing because it can easily serve specialized niches.
  • Adapting to change is crucial in business and particularly small business; not being tied to any bureaucratic inertia, it is typically easier to respond to the marketplace quickly.
  • Small business proprietors tend to be intimate with their customers and clients which results in greater accountability and maturity.
  • Small business owners have the satisfaction of making their own decisions within the constraints imposed by economic and other environmental factors

Definition of Small company under Companies Act 2013

Section 2(85) defines a Small Company as –

‘‘small company’’ means a company, other than a public company,—

(i) 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 five crore rupees; or

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this Section shall apply to - 

(A) a holding company or a subsidiary company;

(B) a company registered under Section 8; or

(C) a company or body corporate governed by any special Act;

Explanation to Definition

Any company which has a paid up share capital of not exceeding Rs.50 lakhs or such higher amount as may be prescribed but not exceeding Rs.5 crores OR turnover as per last profit and loss account which does not exceed Rs.2 crores or such higher amount as may be prescribed but does not exceed Rs.20 crores. The criteria for inclusion of a company as a small company is on the dual basis of either paid up share capital or turnover as per last profit & loss account. If the company breaches any one limit, it goes out of the ambit of Small Company, for e.g. If the paid up share capital is only Rs.25 lakhs but if the turnover goes to Rs.2.5 crores then it automatically gets struck off as a Small Company. A piquant situation could arise whether the company could jump in from Small Company to Non-Small Company on a yearly basis if the turnover keeps fluctuating below and above the limits.

Salient features:

Only a private company can be classified as a small company.

Holding company, subsidiary company, charitable company and company governed by any Special Act cannot be classified as a small company.

For a small company, either the paid up capital should not exceed Rupees fifty lakhs or the turnover as per last statement of profit & loss should not exceed rupees two crores.

The status of a company as “Small Company” may change from year to year. Thus the benefits which are available during a particular year may stand withdrawn in the next year and become available again in the subsequent year.

Exemptions available to a Small Company

Some of the privileges and exemptions available to an Small Company under the Companies Act, 2013 are:–

The annual return of a Small Company can be signed by the company secretary alone, or where there is no company secretary, by a single director of the company.

A small company may hold only two board meetings in a year, i.e. one Board Meeting in each half of the calendar year with a minimum gap of ninety days between the two meetings.

A small company need not include Cash Flow Statement as part of its financial statement.

Provision regarding mandatory rotation of auditor/maximum term of auditor being 5 years in case of an individual and 10 years in case of a firm of auditors is not applicable to an OPC.

SMC vs. Small company

Particulars

SMC

Small company

Turnover

Does not exceed `50 crore

Does not exceed `2 crore unless higher amount is prescribed

Paid-up share capital

No such criterion

Does not exceed `50lakh unless higher amount is prescribed

MERGER PROCESS

Merger process between two or more small companies is to be approved on fast track basis with the approval of ROC, Official Liquidator, members holding at least 90% of shares and majority creditors (9/10 of value)

SOME FAQ’S

  1. Section 173(5) provides that a One Person Company, small company and dormant company shall be deemed to have complied with the provisions of this section if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days. Does this mean that a small company can conduct only two meetings in a year. Whether it should maintain the gap of 90 days between each of its board meeting? If the above is yes, then practically a small company can have only four board meetings with gap of 90 days between each.

Yes, a small company is required to conduct only two meetings in a year. As per the provisions of sub-section (5) of section 173, the requirement of maintaining gap of minimum ninety days between the two Board meetings is mandated only, in case such OPC, small company or dormant company holds one meeting in each half of a calendar year. The holding of two meetings in each half of a calendar year with minimum gap of ninety days is a minimum requirement for these companies. There is no bar in holding more than two Board meetings in a year. Such companies may have any number of Board meetings, if required for smooth running of business.

  1. Whether a private Company having paid-up share capital of rupees 45 lakhs and turnover of Rs. 20 crores as per last audited balance sheet will be treated as small company?

It is not a small company. Section 2(85) defines a small company as a company other than a public company—

(i) 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 five crore rupees; or (ii) turnover of which as per its last profit and loss account does not exceed 2 crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to -

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act.

This means that a private company shall not be covered in the definition of small company if either its paid up share capital exceeds Rs. 50 lakhs or its turnover exceeds Rs. 2 crores. Since the turnover of this company is more than Rs 2 crores i.e. Rs. 20 Crores, it will not be a small company

  1. Will a public Ltd. Company with 7 shareholders and paid up capital minimum of Rs.5 lakhs be considered as Small Company?

No, public company with 7 shareholders and minimum of Rs.5 lakhs share capital will not be considered as a “Small Company” 

  1. A company with capital of 48 lakhs but turn over of say Rs. 100 crores would be a small company as per literal interpretation of the section?

Yes, the two conditions mentioned in section 2(85) are mutually exclusive because,  the word used is ‘OR’ satisfaction of any one condition will entitle the company to remain within the fold of ‘small company’. that means, if either one condition is satisfied you are a small company

  1. Can a Small Company jeld its first BOD on 28 august .and can file MGT 14 on 01 sep without penalty?

A small company is required to hold one board meeting in each half of calendar year i.e. one meeting from Jan-June and another meeting from July to Dec. So the company can hold its first Board Meeting in the financial year on 28th August 2014 and can file MGT-14 within 30 days i.e. by 27th September 2014.

Conclusion

This new Section will prove to be boon to Entrepreneurial Companies with target to roll over within the set targeted limits, Companies may also be seen jumping from Small to Non Small due to the Changes in Turnover and share capital. The Exemptions specified gives relaxation to fair bit giving set relief in compliance framework. Small companies segregation will allow companies to analyze their position leading to setting of higher targeted turnover leading to higher operating profits to the Company

Mr.Nimish.A.Chodankar

Reg. No.:WRO0455539


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