INTRODUCTION
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.