Benefits for Small Companies

The Companies Act of 2013 in India introduced the concept of “small companies” to provide benefits for small companies. These small companies are like a special type of private company. They get this special status based on their size, which means their paid-up share capital and turnover. The idea is to make things easier for them and give them some special benefits under the law. This article explains what these small companies are all about and what advantages they get under the Companies Act of 2013.

What Are Small Companies?
Small companies in India are newer and were introduced through the Companies Act of 2013 to support small businesses better. These small companies are essentially a special kind of private company registered under this Act. They are called “small” based on their size, which means how much money they have in shares and how much money they make. The reason for making this distinction is to provide them with unique legal benefits. This article aims to explain all the benefits and relaxations that small companies get under the Companies Act of 2013.

Why Small Companies?
The thought behind it was that small businesses shouldn’t have to deal with complex rules designed for big companies. So, small companies were given some special exemptions from certain legal procedures to make things simpler for them.

These businesses needed simpler financial reporting and audit rules and easier ways to manage their money. In essence, small companies should be able to be transparent without spending too much money.

Definition of Small Companies:
A small company, according to the Companies Act of 2013, is a company that’s not public and has:
1. Less than Rs. 2 crores (or a higher amount set by the government, but not more than Rs. 10 crores) in paid-up share capital.
2. Less than Rs. 20 crores (or a higher amount set by the government, but not more than Rs. 100 crores) in turnover during the previous financial year. (This changed in 2021)

Features of Small Companies:

• Small companies can only be private companies, not public ones.
• They face smaller penalties if they don’t follow the Companies Act’s rules.
• If a small company grows too big in terms of money, it might lose some of the special benefits in the next year.

Benefits for Small Companies under the Companies Act 2013: Small companies enjoy a range of privileges and exemptions granted by law, affording them advantages over larger counterparts. Some of these benefits include:

• Cash Flow Statement (Proviso to Section 2(40)): Small companies are not obligated to include a cash flow statement in their financial statements.
• Financial Assistance for Buy-Back (Section 67(2)): Small companies can provide financial assistance, such as loans or guarantees, for the purchase of their own shares or the shares of their holding company.
• Signing of Annual Return (Section 92(1)): The annual return of a small company must be signed by the company secretary or, if there is no company secretary, by the company’s director. There is no requirement for it to be signed by a company secretary in practice.
• Report on AGM (Section 121(1)): Small Companies are not mandated to prepare a report at the Annual General Meeting.
• Statement Showing Performance of Board (Section 134(3)(p)): Small Companies are not required to prepare a statement demonstrating the formal annual evaluation of the Board’s performance, its Committees, and individual directors.
• Number of Directors (Section 149(1)): Small Companies are not obligated to have more than two directors on their Board.
• Independent Directors (Section 149(4)): Small Companies are exempt from appointing independent directors to their Board.
• Rotation of Directors (Section 152(6)): Unlike public companies, small companies are not required to retire a specified proportion of directors each year.
• Disqualification of Director (Section 164(3)): Small companies may include additional grounds for disqualification for appointment as a director in their Articles.
• Number of Directorships (Section 165(1)): The restrictions on the total number of directorships that an individual can hold in a public company (maximum of 10) do not apply to directorships in small companies that are neither holding companies nor subsidiaries of public companies.
• Vacation of Office of Director (Section 167(4)): Small companies can specify additional grounds for the vacation of a director’s office in their Articles.
• Number of Board Meetings (Section 173(5)): Small companies are required to hold at least one Board meeting in each half of a calendar year, with a gap of no less than ninety days between the two meetings, as opposed to the four meetings mandated for other companies.
• Contract of Employment (Section 190(4)): Provisions regarding employment contracts with managing directors or whole-time directors do not apply to small companies.
• Managerial Remuneration (Section 197(1)): Unlike public companies, the total managerial remuneration paid by a small company to its directors, including managing directors and whole-time directors, and its manager, in any financial year, can exceed eleven percent of the net profits.
• CARO, 2020: Reporting requirements outlined in the Companies (Auditor’s Report) Order, 2020, do not apply to small companies.
• Matters in Board’s Report (Rule 8A of Companies (Accounts) Rules, 2014): Small Companies are exempt from certain reporting requirements in the Board’s report under Section 134(3) and Rule 8 of Companies (Accounts) Rules, 2014.
• Auditor’s Report (Section 143(3)): Auditor’s reports for small companies do not need to indicate whether there are adequate internal financial controls in place and the operating effectiveness of such controls with reference to financial statements.
• Rotation of Auditors (Section 139(2)): While all companies must rotate their auditors under Section 139(2) of the Companies Act 2013, small companies are exempt from this requirement.
• Lesser Penalties (Section 446B): In cases where a penalty is imposed on a small company for non-compliance with Companies Act provisions, the company and its officer in default are liable to a penalty that is not more than half of the penalty specified in the provisions. This is subject to a maximum of Rs. 2 lakh for a company and Rs. 1 lakh for an officer in default.

In Conclusion:
The benefits for small companies in the Companies Act of 2013 have given a boost to small businesses in India. With fewer rules to follow and simpler ways to manage their finances, small companies can focus on growing without getting bogged down by complicated procedures. While they might not have a fancy name, their special status under the law comes with several advantages that can really help emerging businesses.