Definition of “Small Company”
Under UK company law, a private company is classified as a “small company” if it meets at least two of the following three criteria for the current and preceding financial year:
- Its net worth does not exceed £5.1 million.
- Its turnover does not exceed £10.2 million.
- The average number of employees does not exceed 50.
These thresholds apply for accounting periods starting on or after January 1, 2016. A company in its first financial year may still qualify as a small company if it falls within these limits. Additionally, if the company has qualified in the two preceding financial years, it may continue to qualify as a small company.
Certain small companies can prepare abridged accounts for their members and for delivery to the Registrar of Companies. Under current rules, many small companies can also claim an exemption from statutory audit requirements. However, a company is not eligible for the exemptions if it is part of a group that includes a public company, a banking or insurance company, or an authorized person under the Financial Services Act 1986.
Related terms: micro-entity, SME (Small and Medium-sized Enterprise).
Examples
Example 1
Tech Innovations Ltd:
- Net Worth: £4.5 million
- Turnover: £8 million
- Employees: 45
Tech Innovations Ltd qualifies as a small company because it meets all three criteria.
Example 2
Retail Ventures Ltd:
- Net Worth: £6 million
- Turnover: £9 million
- Employees: 40
Retail Ventures Ltd qualifies as a small company because it meets two out of the three criteria (turnover and number of employees).
Example 3
Construction Solutions Ltd:
- Net Worth: £5.5 million
- Turnover: £10.5 million
- Employees: 55
Construction Solutions Ltd does not qualify as a small company because it does not meet any of the criteria.
Frequently Asked Questions
Q1: What is considered ‘Net Worth’ for a small company?
A: Net worth for a small company is the total assets minus the total liabilities.
Q2: Are small companies required to follow specific filing requirements?
A: Yes, small companies have specific filing requirements and may prepare abridged accounts for members and for delivery to the Registrar of Companies.
Q3: Can a first-year company qualify as a small company?
A: Yes, a company in its first financial year can qualify as a small company if it meets the qualifying criteria.
Q4: Is statutory audit mandatory for small companies?
A: Many small companies can claim exemption from statutory audits, except if they are members of certain types of groups including public companies or banking companies.
Q5: What happens if a small company no longer meets the criteria?
A: If a small company no longer meets the qualifying criteria for consecutive years, it might lose its small company status and be subject to different regulations.
Related Terms
Net Worth
Definition: The total assets minus the total liabilities of a company.
Turnover
Definition: The total sales revenue generated by a company within a specific period.
Abridged Accounts
Definition: A simpler form of accounts that small companies can prepare, showing less detailed information.
Statutory Audit
Definition: A legally required review of the accuracy of a company’s or government’s financial statements and records.
Group
Definition: A collection of companies that are associated with each other through parent and subsidiary relationships.
Micro-Entity
Definition: The smallest category of business entity that meets even lower criteria than small companies, with specific simplifications in financial reporting.
SME (Small and Medium-Sized Enterprise)
Definition: A broader classification that includes small companies but also covers medium-sized companies that exceed the criteria for small companies.
Online References
- UK Government: Companies House
- Association of Chartered Certified Accountants (ACCA)
- Institute of Chartered Accountants in England and Wales (ICAEW)
Suggested Books for Further Studies
- “Company Law” by Alan Dignam and John Lowry - Covers the essentials of UK company law.
- “Accounting for Small Business Owners” by Tycho Press - Provides insights into managing accounting for small businesses.
- “Financial Reporting for Smaller Companies” by Marina Chiappetta - Focuses on reporting standards and practices applicable to smaller firms.
Accounting Basics: “Small Company” Fundamentals Quiz
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