Definition of Small Business

Definition of Small Business

Definition of Small Business

When presenting the Union Budget for 2021, the Indian Finance Minister proposed changing the definition of a small company as stated in section 2(85) of the Companies Act, 2013. The proposal’s primary goals were to make doing business easier and lessen the burden of compliance on a large number of businesses.

As a result, the Companies (Specification of Definitions Details) Amendment Rules, 2021 were published by the Ministry of Corporate Affairs on February 1st, 2021. A change in the definition of a small corporation was announced by the aforementioned modified rule. The aforementioned modification will take effect on April 1st, 2021.

Comparison of the New and Old Definitions of Small Companies

The maximum cap on paid-up capital and turnover was raised by the change to the definition of a small company proposed in the Budget 2021. The restrictions were raised to allow more businesses to fall under the definition of a small business and qualify for the advantages granted by the Companies Act of 2013.

Types of Small companies

General Partnership

Two or more people who hold a general partnership are responsible for the financial and legal aspects of their company’s operations. In a general partnership, the small business owners share liability equally but may receive varying amounts of compensation depending on the provisions of their individual partnership agreement about capital, contributions, and shares. General partners can deduct the majority of business losses from their personal tax returns, just like a sole proprietorship can.

Together with their personal taxes, general partners also have to file self-employment taxes. Business owners in the same industry, such as developers, doctors, or attorneys, may benefit from this type of relationship. It could be simpler to apply for and secure business funding because these small enterprises have multiple proprietors.

 Partnership limited (LP)

When two or more small business owners form an LP, it is similar to a general partnership but divides the financial and legal duties between the general and limited partners according to a written agreement. In addition to managing the day-to-day affairs of the small business, a general partner retains personal liability for commercial dealings and legal issues. Limited partners contribute to the operational funding of their small firm but have little to no management involvement.

With this kind of small business ownership, investors can act as limited partners without being liable for the management of the business or any potential liabilities. Restricted partners might also pay less in taxes due to their limited involvement in corporate operations. A limited partnership could be advantageous for medical practices.

Limited obligation business (LLC)

A limited liability company (LLC) enables small business owners to have one or more owners who are not personally liable for business activities without any danger to their personal property. There may be state-specific filing fees and potential biennial fees associated with forming an LLC. LLCs give small business owners the option of filing their corporation taxes and self-employment taxes separately from their business taxes or as part of their personal taxes.

Owners of LLCs may report profits and losses on their personal tax returns when submitting small business taxes. LLC owners are not required to divide gains or losses equally, depending on the conditions of their ownership agreement. While enjoying the liability protections of a corporation, this kind of small business structure can include broad or limited forms of partnerships.


A non-profit small business makes money that pays for business expansion and other operating expenses. These companies frequently provide resources and support for initiatives that benefit the local community or other public works initiatives. Small business entrepreneurs strive to build a network of donors or financial backers to assist them with business development projects, such as a public service or product, in order to operate a non-profit and have the required money.

Non-profit small business owners are eligible for tax exemptions and other government aid programmes because they don’t make a profit from their operations. These small enterprises adhere to particular operational guidelines in order to preserve their position as non-profit organisations due to non-profit tax exemptions.

Features of a Small Company

Following are some of the main traits of a small business that can be understood:

  1. Low revenue and profitability:

A small business often generates less income and profit than a large or global organisation. This is heavily influenced by the kind of business they are engaged in. However, because this form of firm may have a higher profit margin, a lesser revenue cannot be equated to decreased profitability.

  1. Less Personnel:

Because they are smaller and easier to manage than giant corporations with numerous branches or locations, small businesses will only have a small human resource team with one person or a single team managing the organization.

Benefits of the Companies Act for Small Businesses

The Companies Act offers many advantages in the form of compliance leniencies, which lightens the burden on these businesses. The benefits to small companies under the Act are as follows:

Board Meetings

Small companies must have a maximum of two meetings in a financial year. Whereas a private limited company that is not considered a small company must conduct four board meetings in a financial year.

Annual Return

The annual return filing of a small company can be signed by either a Company Secretary (CS) or a company director. A director and a CS must both sign the annual return filing for a private limited business that is not a small company.

Cash Flow

Payables Statement A cash flow statement is not necessary for a small business’ financial statement. A private limited company that does not fall within the definition of a small company, however, is required to compile a cash flow statement as part of its financial statement. Rotations of auditors Small businesses do not need to rotate their auditors. A private limited business that is not categorised as a small corporation, however, is required by the Act to rotate its auditors every five to 10 years. Charges & Fees The Act specifies less severe penalties for Small Companies than it does for other private or public businesses. In comparison to the rates charged by other businesses, it also offers lower fees for filing documents with the ROC.

Rotations of auditors

Small businesses do not need to rotate their auditors. A private limited business that is not categorised as a small corporation, however, is required by the Act to rotate its auditors every five to 10 years.

Fewer Employees

Small businesses hire a smaller staff than big businesses since they have less paid-up capital and turnover. Small businesses may occasionally even be managed by a single person or team.

A smaller market

Small businesses, like convenience stores in a rural township, cater to the smaller segments of the community or society. As a result, they only have a narrow market in which to conduct business.

Fewer places

Small businesses typically have a single location rather than numerous branches. They typically do not establish themselves in other nations.

How to Register a Company Online – the Registration Process

Company registration in India benefits startups since it offers them an advantage over those who have not registered. The process of registering  involves many compliances. However, you needn’t worry as SRV ASSOCIATES will help you.

  • Step 1: Obtain DSC
  • Step 2: Apply for the DIN
  • Step 3: Application for the name availability
  • Step 4: Submission of MoA and AoA to register a private limited company
  • Step 5: Apply for the PAN and TAN of the company
  • Step 6: RoC issues a certificate of incorporation with a PAN and TAN


Shareholder agreement.

Founders agreement.

Certificate of incorporation.

No objection certificate (NOC)

Company PAN card.

TIN number.

Non-disclosure agreement.