Union Budget 2021: New Definition Of Small Companies For Startups; Restrictions Eased For One-Person Companies

Speaking at the Union Budget 2021, finance minister Nirmala Sitharaman has proposed to revise definition under Companies Act, 2013 for small companies by increasing their threshold for capitalisation from not exceeding INR 50 Lakh to not exceeding INR 2 Cr and turnover from not exceeding INR 2 Cr to not exceeding INR 20 Cr.

“This will help more than 200K companies in easing their compliance requirements,” said the finance minister.

The concept of small company was introduced under Section 2(85) of the Companies Act  which had earlier defined a company as small company if

• It has a paid up share capital of not more than INR 50 Lakh or such higher amount as may be prescribed which shall not be more than INR 10 Cr
• It has an annual turnover of not more than INR 2 Cr or such higher amount as may be prescribed which shall not be more than INR 100 Cr.

It must be noted that a public company, a subsidiary of another company, Section 8 company or a company governed under any Special Act will by default not be recognised as a small company regardless of the above criteria.

“As a further measure which directly benefits startups and innovators, the finance minister also proposed the incentivisation of OPCs (one person company) grow without any restriction on paid-up capital and turnover, allowing their conversion to any other type of company at any time reducing the residency limits for an Indian citizen to set up and OPCs company in 182 days to 120 days and allow also non-resident Indians to incorporate OPCs in India,” said the finance minister.  This will be a big boost for startups in the country.

By the new definition of small companies under the Companies Act, a large number of startups will be recognised as small companies.

Small companies enjoy certain benefits over other companies in terms of compliance requirements. For instance, a small company needs to hold only two board meetings in a year, unlike other companies which are required to hold four such meetings in the same period.

Small companies are not required to maintain their cash flow statement and their annual returns could simply be signed by simply a company secretary or a single director. These companies are also not required to change their auditor under Section 139(2) which is mandatory for other companies.

In case of regulatory violations, the penalties levied are also comparatively low.

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