New criteria of small business


The Ministry of Corporate Affairs has notified a change to the Companies (Specification of Definitions and Details) Rules, 2014, which will take effect on April 1, 2021. The MCA (Ministry of Corporate Affairs) made this change in response to the Honourable Finance Minister’s proposal in the Union Budget 2021 to revise the definition of Small companies in India by increasing the paid-up capital limit from INR 50 lacs to INR 2 crores and increasing the turnover threshold from INR 2 crores to 20 crores.

According to the official statement, nearly 13.2 million companies are currently active, with more than 12 million classified as small businesses. Recently, in Budget 2021, there was a development that aided more businesses, as the definition was changed with the goal of providing the benefit of the liberalised regime. Prior to the implementation of the aforementioned change, nearly 8 lacs companies were classified as small businesses. However, changes in the paid-up share capital and turnover threshold requirements have enabled an additional 2 lakh companies to benefit from the relief.

The New Definition of Small Businesses

Companies with a paid-up capital of INR 2 crore or less and a turnover of INR 20 crore or less are defined as small companies under the new definition and threshold limits. The previous threshold was INR 50 lacs in paid-up capital and INR 2 crore in turnover.

In terms of compliance requirements, small businesses have several advantages over larger corporations. A small company, for example, is only required to hold two board meetings in one fiscal year, whereas larger companies are required to hold four such meetings during the same period.

Aside from that, small businesses are not required to keep a cash flow statement, and their annual returns can be signed by a company secretary or a single director.

What are the characteristics of a Small Business?

The following are some of its characteristics:

Low profitability and revenue: In general, a small company has less revenue than a large one. The amount of revenue generated by a business depends on its type. However, lower revenue does not imply lower profitability.

Fewer Employees: It onboards a smaller team of employees than others. Small businesses are sometimes managed by a single person or team.

Smaller Market Area: Small businesses are created to serve the smaller sections of society or communities, such as a convenience store in a rural township. As a result, they only have a small area to conduct business.

Sole proprietorship/partnership and taxes: the corporate working structure is unsuitable for small-scale working organisations. Regardless, small businesses should prioritise the formation of sole proprietorships, partnerships, and limited liability companies. It gives the office owners a strong sense of managerial control while minimising the hassle and expense of company registration. Its owner must report business earnings and expenses on their personal tax returns. Because small businesses do not file their own taxes.

Fewer locations: instead of several branches, it is found in a small area. Other countries and states do not grasp the hands of small scale businesses. Its sales are limited to a single region.

Furthermore, it is much simpler and more feasible if it is controlled by the home itself.

What are the benefits?

Every business structure has advantages and disadvantages.

It also has some benefits under the Companies Act of 2013, which are listed below:

Board Meetings: Two meetings in a financial year are more than enough. Any private limited company that is not considered small must hold four board meetings in a fiscal year.

Annual Return: The annual return filing can be signed by a CS or a small company director. Any private limited company that is not considered a small company must have both a director and a company secretary sign its annual return filing.

Cash flow statement: A cash flow statement is not required for any private limited company that falls into the category of a small company. In contrast, if a private limited company does not fall into this category, a cash flow statement must be prepared as part of the financial statement.

Auditor Rotation: Any private limited company that falls into the category of a small company is exempt from the requirement to rotate auditors. However, private limited companies that are not classified as such must rotate auditors every 5 to 10 years, as required by the Companies Act of 2013.