Small Company Concept, Definition, Features, Formation

According to Section 2(85) of the Companies Act, 2013, a Small Company is defined as a company, other than a One Person Company (OPC), that meets the following criteria:

1. Paid-up Capital: The paid-up share capital of the company does not exceed ₹2 crores (or any higher amount as may be prescribed).
2. Turnover: The annual turnover of the company does not exceed ₹20 crores (or any higher amount as may be prescribed).

This definition highlights that small companies are primarily characterized by their limited scale of operations, which distinguishes them from medium and large companies.

Features of a Small Company:

1. Limited Capital Requirement

One of the defining features of a small company is its limited capital requirement. The cap on paid-up capital (₹2 crores) allows entrepreneurs to establish businesses without substantial financial backing, making it accessible for new ventures.

2. Small Scale of Operations

Small companies generally operate on a small scale, catering to niche markets or specific customer segments. Their operations are often localized, which allows them to respond quickly to market demands and changes.

3. Fewer Regulatory Requirements

Small companies are subject to less stringent regulatory requirements compared to larger entities. This includes exemptions from certain compliance norms under the Companies Act, reducing the burden of documentation and procedural complexities.

4. Simplified Governance

The governance structure of small companies is typically less complex. With fewer shareholders and directors, decision-making processes are often streamlined, allowing for quick and efficient management.

5. Flexibility

Small companies have a higher degree of operational flexibility. They can adapt their business strategies and operations more readily to changing market conditions, customer preferences, and technological advancements.

6. Easier Access to Financing

Small companies often have better access to financing options, including loans, grants, and government support schemes. Various initiatives aim to promote small businesses, offering financial assistance with favorable terms.

7. Focus on Innovation

Due to their size and scale, small companies can often focus on innovation and creativity. They tend to be more agile, experimenting with new ideas and products, which can lead to niche market opportunities.

Formation of a Small Company:

The formation of a small company involves several essential steps, similar to any other type of company under the Companies Act, 2013:

1. Choosing a Company Name

The first step in forming a small company is selecting a unique and appropriate name that complies with the Companies Act. The name should not resemble any existing company or trademark.

2. Filing of Incorporation Documents

The next step is to prepare and file the necessary incorporation documents with the Registrar of Companies (ROC). These documents include:

• Memorandum of Association (MOA): This document outlines the company’s objectives, scope of operations, and powers.
• Articles of Association (AOA): This document contains the rules and regulations governing the internal management of the company.

3. Obtaining Digital Signature and Director Identification Number (DIN)

Before filing incorporation documents, the directors of the company must obtain a Digital Signature Certificate (DSC) and a Director Identification Number (DIN). The DSC is required for online filings, while the DIN serves as a unique identification for directors.

4. Paying Registration Fees

Upon filing the incorporation documents, the company must pay the requisite registration fees to the ROC. The fee varies based on the authorized capital of the company.

5. Certificate of Incorporation

Once the documents are approved, the ROC issues a Certificate of Incorporation, signifying the legal formation of the company. This certificate contains important details, including the company’s name, registration number, and date of incorporation.

6. Opening a Bank Account

After incorporation, the small company must open a bank account in its name to manage financial transactions. This account will be used for all business-related banking activities.

7. Compliance and Registrations

Following incorporation, the company must comply with various regulatory requirements, including obtaining relevant licenses, registering for Goods and Services Tax (GST), and filing annual returns with the ROC.