Small Company Under Companies Act, 2013: Compliance Reliefs
Small-company thresholds, exemptions from cash flow statements, and reduced board-meeting requirements.
Small Company Under Companies Act, 2013: Compliance Reliefs
The Companies Act, 2013, offers significant compliance relaxations for companies classified as "small companies." These reliefs aim to reduce the regulatory burden on smaller entities, fostering ease of doing business. Key benefits include simplified annual filings, fewer board meetings, and exemptions from certain reporting requirements, directly benefiting founders and small business owners by saving time and resources.
What is a "Small Company" under the Companies Act, 2013?
A "small company" is a private company that meets specific financial thresholds for paid-up share capital and turnover, as defined by the Companies Act, 2013.
Specifically, as per Sec. 2(85) of the Companies Act, 2013, a "small company" means a company, other than a public company,
- (i) paid-up share capital of which does not exceed four crore rupees; and
- (ii) turnover of which as per its last profit and loss account does not exceed forty crore rupees.
It's crucial to note that these thresholds have been revised periodically. The current limits were introduced to expand the scope of companies benefiting from these relaxations. However, certain companies are explicitly excluded from being classified as small companies, regardless of their capital or turnover:
- A holding company or a subsidiary company.
- A company registered under Sec. 8 (not-for-profit companies).
- A company or body corporate governed by any special Act.
What are the key compliance relaxations for small companies?
Small companies enjoy several key compliance relaxations, including exemptions from preparing a cash flow statement, filing a simplified annual return, holding fewer board meetings, and simplified audit report requirements. These reliefs are designed to streamline operations and reduce administrative overhead.
Let's delve into the specific relaxations:
1. Exemption from Cash Flow Statement
Small companies are exempt from including a cash flow statement as part of their financial statements.
Sec. 2(40) of the Companies Act, 2013 defines "financial statement" to include: (i) a balance sheet as at the end of the financial year; (ii) a profit and loss account, or income and expenditure account, for the financial year; (iii) a cash flow statement for the financial year; (iv) a statement of changes in equity, if applicable; and (v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv).
However, the proviso to Sec. 2(40) explicitly states that "Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement." This exemption significantly reduces the complexity and effort required in preparing annual financial reports for small companies.
2. Simplified Annual Return Filing (Form MGT-7A)
Small companies can file a simplified annual return using Form MGT-7A instead of the more elaborate Form MGT-7.
Sec. 92(1) of the Companies Act, 2013 mandates every company to prepare an annual return. Rule 11(1) of the Companies (Management and Administration) Rules, 2014 specifies that "Every company shall file its annual return in Form No. MGT-7." However, Rule 11(1A) provides the relaxation: "A small company, and a One Person Company shall file the annual return in Form No. MGT-7A."
Form MGT-7A requires less detailed information compared to Form MGT-7, focusing on essential particulars like company details, shareholding structure, indebtedness, and details of directors and key managerial personnel. This simplification reduces the time and resources spent on annual compliance.
3. Fewer Board Meetings
Small companies are required to hold fewer board meetings compared to other companies.
Sec. 173(5) of the Companies Act, 2013 states 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 Board Meeting has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days."
This means small companies only need to hold two board meetings in a financial year, with a minimum gap of 90 days between them. Other companies are generally required to hold at least four board meetings in a year, with a maximum gap of 120 days between two consecutive meetings. This relaxation offers greater flexibility in managing board affairs.
4. Simplified Audit Report Requirements
While small companies are not exempt from statutory audits, they benefit from certain simplifications in the audit report.
For instance, the auditor's report for small companies does not need to include reporting on internal financial controls over financial reporting, as per Rule 10A of the Companies (Audit and Auditors) Rules, 2014. This reduces the scope and complexity of the audit process, potentially leading to lower audit fees and a quicker audit completion.
5. Reduced Penalties
Small companies are subject to lower penalties for non-compliance with certain provisions of the Companies Act, 2013.
Sec. 446B of the Companies Act, 2013 states that "Notwithstanding anything contained in this Act, if a penalty is payable for non-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, or any of its officer in default, or any other person, as the case may be, shall be liable to pay a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be." This provides a significant relief in case of inadvertent defaults.
Comparison: Small Company vs. Other Private Companies
Here's a comparative overview of key compliance requirements for small companies versus other private companies:
| Feature | Small Company
The most important compliance requirements for small companies are:
- Maintaining proper books of account.
- Filing annual financial statements (Form AOC-4) and annual return (Form MGT-7A) with the Registrar of Companies (ROC).
- Conducting at least two board meetings in a calendar year.
- Complying with provisions related to directors' appointments and resignations.
- Adhering to GST regulations, if applicable.
- Fulfilling TDS/TCS obligations, if applicable.
How SP & SC helps
SP & SC Legal and Taxation Services provides comprehensive compliance support for small companies, ensuring adherence to the Companies Act, 2013, and other relevant regulations. Our services include preparing and filing annual returns (MGT-7A), financial statements (AOC-4), conducting board meetings, and advising on various corporate governance matters, allowing you to focus on your core business. Explore our full range of services at /services/compliance/annual-filings.
Frequently asked questions
What are the financial thresholds to qualify as a small company?
A company qualifies as a small company if its paid-up share capital does not exceed four crore rupees AND its turnover as per its last profit and loss account does not exceed forty crore rupees. Both conditions must be met.
Can a public company be classified as a small company?
No, a public company cannot be classified as a small company. The definition of a small company explicitly states it must be "a company, other than a public company."
Do small companies need to appoint an auditor?
Yes, small companies are still required to appoint a statutory auditor and have their financial statements audited as per the Companies Act, 2013. The exemption is primarily from certain detailed reporting requirements within the auditor's report, not from the audit itself.
What happens if a small company exceeds the thresholds in a financial year?
If a company exceeds the paid-up capital or turnover thresholds in a financial year, it will cease to be a small company from the immediately succeeding financial year. Consequently, it will then be subject to the full compliance requirements applicable to other private companies.
Are there any specific exemptions for small companies regarding corporate social responsibility (CSR)?
Yes, as per Sec. 135 of the Companies Act, 2013, CSR provisions are applicable to companies meeting certain net worth, turnover, or net profit thresholds. Small companies, by their very definition, are unlikely to meet these thresholds and are therefore generally exempt from CSR obligations.
Can a subsidiary company be a small company?
No, a subsidiary company cannot be classified as a small company, even if it meets the paid-up capital and turnover thresholds. The definition of a small company specifically excludes holding companies and subsidiary companies.