Understanding Benefits for Small Companies under Companies Act 2013?

Understanding Benefits for Small Companies under Companies Act 2013?

Small businesses are the lifeblood of any economy, driving innovation, creating jobs, and contributing to economic growth. Recognizing the unique needs and challenges faced by small companies, the Companies Act 2013 in India introduced specific provisions to support and incentivize their growth. In this article, we'll explore the concept of a "Small Company" as per the Companies Act 2013, delve into the reasons behind its introduction, break down the definition, explore its features, and highlight the significant benefits it offers to small businesses.

Small Company as per Companies Act 2013:
The Companies Act 2013, which replaced the earlier Companies Act 1956, introduced the concept of a "Small Company" to provide a regulatory framework tailored to the needs of smaller businesses. This recognition of small companies was a crucial step in simplifying compliance requirements and promoting ease of doing business in India.

The Reason Behind Introduction of Small Company
The introduction of the Small Company concept under the Companies Act 2013 aimed to address several key objectives:

  1. Reducing Compliance Burden:Small companies often lack the resources and infrastructure to manage extensive compliance requirements. The Act sought to reduce this burden by prescribing relaxed compliance norms for such entities.
  2. Promoting Entrepreneurship: By easing regulatory requirements, the Act aimed to encourage entrepreneurship and facilitate the growth of startups and small businesses.
  3. Enhancing Competitiveness: Providing a regulatory environment tailored to the needs of small companies enhances their competitiveness in the market, fostering a more level playing field.

Definition of a Small Company as per Companies Act 2013
The Companies Act 2013 defines a "Small Company" under Section 2(85) as follows:

  1. A company that is not a public company.
  2. Paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed (not exceeding ten crore rupees).
  3. 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 (not exceeding one hundred crore rupees).

Breaking Down the Definition of Small Company as per Companies Act 2013
Let's break down the key elements of this definition:

  1. Not a Public Company: A small company must be a private company, which typically has restrictions on the transfer of shares and a limited number of shareholders.
  2. Paid-up Share Capital The paid-up share capital should not exceed fifty lakh rupees. This capital represents the actual investment made by shareholders in the company.
  3. Turnover: The annual turnover, as per the last profit and loss account, should not exceed two crore rupees. Turnover refers to the total revenue generated from the company's primary operations.

Features of a Small Company as per Companies Act 2013
Small companies under the Companies Act 2013 enjoy several key features and benefits:

  1. Fewer Compliance Requirements: Small companies face reduced compliance burdens compared to larger entities. They have simplified accounting and auditing requirements, making it easier to meet regulatory obligations.
  2. Relaxed Board Composition:The Act allows small companies to have a minimum of just two directors, simplifying corporate governance.
  3. Exemptions from Certain Provisions: Small companies are exempt from certain provisions applicable to larger companies, such as the requirement for independent directors and related party transactions' approval by shareholders.

Benefits of a Small Company as per Companies Act 2013
Small companies registered under the Companies Act 2013 enjoy various benefits, including:

  1. Ease of Compliance: The most significant advantage is the simplified compliance process. Small companies face less regulatory scrutiny, reducing the time and cost associated with meeting statutory requirements.
  2. Cost Savings: Reduced compliance requirements translate into cost savings for small companies. They can allocate more resources to business development and growth
  3. Promoting Entrepreneurship: The Act's provisions encourage entrepreneurship by making it easier to start and operate a small business. This fosters innovation and job creation.
  4. Enhanced Access to Capital: Small companies can raise capital more easily from a limited number of shareholders, making it easier to secure investments and expand operations.
  5. Competitive Edge: By providing a level playing field and regulatory support, the Act enhances the competitiveness of small businesses in the market.

Choosing the right business structure is a crucial decision for any entrepreneur. The differences between a proprietorship and a firm in terms of ownership, liability, legal entity, and registration play a significant role in determining which structure aligns better with the business's objectives and future plans. A sole proprietorship offers simplicity and autonomy, while a firm enables shared resources, skills, and liability distribution. Business owners should carefully assess their needs, long-term goals, and potential risks before making an informed choice between these two fundamental business structures.

For more information Click here