I recently met one of my cousins in a party. He is an Engineer and an MBA from a reputed university. I was generally discussing with him about his career plans.
He said that he wants to become an entrepreneur and get into the fintech space. One of his friends was interested in joining him and so they had plans to form a company. They are also aiming to get funding after a couple of years.
But the cost was a concern for them. They did not want to spend lot on incorporation of a company and then maintenance of the company, regulatory compliance costs etc.
We discussed about various options. That discussion led me to write this post. Read on.
Several entrepreneurs are aiming to form a company or a Limited Liability Partnership to enjoy the advantages of limited liability and separate identity.
The Companies Act, 2013 too introduced new concepts or definitions to give impetus to such entrepreneurs. These concepts were absent in the Companies Act, 1956.
Two of such concepts are
- “Small Company” and
- “One person company (OPC)”
I have already written about OPC in one of my earlier posts. Click here to read.
In this post I will throw more light on the concept of a “Small Company”.
What is a small company?
As defined in Section 2(85) of the Companies Act, 2013:
Small company means a company, other than a public company, whose paid up capital does not exceed Rs. 50 lakhs AND turnover does not exceed Rs. 2 crores.
So, a private company which has a paid up capital of less than Rs. 50 lakhs as well as turnover of less than 2 crores will be considered as a small company. A company has to fulfil both the criteria of paid up capital and turnover to qualify as a small company.
However, there are certain exceptions to it.
What will not be a Small Company?
The following types of companies will not be considered as “small company” even though they fulfil the criteria.
- a holding company or a subsidiary company;
- a company registered under section 8; or
- a company or body corporate governed by any special Act;
- a public company
Hence, a company, which is a holding company or a subsidiary company, even though it is a private company, will not be considered as a small company.
Similarly, a public limited company and a company which is a non-profit organisation or has charitable objectives (section 8 of Companies Act, 2013) will not be considered as a small company.
However, if a small company crosses the threshold limits of either the paid-up capital or turnover or both, it will not be considered as a small company. After that, all the provisions of the Companies Act, 2013 for the private companies will be applicable.
So, e.g. a company can be a small company in one year and not be a small company in next year if its turnover increases to above Rs. 2 crores.
What are the advantages of small company?
A small company, which is a private company, enjoys certain privileges as compared to a normal private company.
They are:
#1 – Cash Flow Statement: It is NOT mandatory to include cash flow statement in financial statements for a small company, which is otherwise mandatory for a private company.
#2 – Signing of Annual Return: The annual return of a small company can be signed by its Company Secretary (CS) alone. However, if it does not have a CS, a single director can sign the annual return.
#3 – Board Meetings: A small company has to hold at least two Board meetings, one board meeting in each half of a calendar year. Also the gap between two meetings should be more than 90 days. So it has the liberty to hold only two Board meetings, as against four Board Meetings for a private company.
#4 – Pre-certification of forms: There are certain forms, which if filed by a small company, do not need pre-certification of a practicing CA or a CS. Few of them are:
- Form INC- 22 : For intimation or change in the registered office
- Form DIR – 12 : For changes in the director’s information
- Form MSC – 1 : For application for dormant company
- Form ADT – 1: For appointment of auditors
Ministry of Corporate Affairs (MCA) had issued a notification for certification of various forms. Click here to read the MCA notification.
#5 – Less filing fees : Small companies have to pay less fee for filing certain forms with MCA as compared to other private companies. This is especially in case of incorporation or amalgamation or merger of small company.
#6 – Merger and amalgamation of small companies : The merger and amalgamation of two or more small companies will be dealt with the procedure of Fast Track Merger.
#7 – Rotation of auditors: The provisions for rotation of statutory auditors will not be applicable to small companies.
The advantages of OPC and Small Company are very similar.
The concepts of OPC and small companies can be advantageous to small entrepreneurs due to lower expenses and lesser compliance.
If you wish to form a company, including an OPC, you can write to me at kruti@cskruti.com
Excellent. Precise write up on small company.
Thanks a lot, Aditi!