What is a company limited by guarantee?

A company limited by guarantee could be described as a halfway house between a partnership, where every partner is liable for the debts of the partnership, on the one hand, and a limited company, with shares, on the other hand.

Why Set Up As A Company Limited By Guarantee?

The structure is most useful for an organisation where:

• it is not appropriate for a limited number of shareholders to have the controlling power; or
• where it may be inconvenient constantly to be transferring and recording changes of share ownership; or
• where the organisation is not one where it is appropriate for its members personally to own any share in the assets of the organisation.

Charitable, voluntary, social and other types of non-profit organisation tend to set up as a company limited by guarantee. That makes it - at least by the time they have a reasonable turnover and want to take on premises or staff.

Likewise, organisations which expect to achieve such success in the future will often start out as a company limited by guarantee so that they do not need to convert at a later date.

What Are The Advantages Of Being A Company Limited By Guarantee?

As mentioned earlier, one of the primary advantages of setting up a company limited by guarantee is that the members generally set a very low limit on their personal liability if the company runs into trouble. That means their private assets are fully protected. If the company goes into liquidation or gets sued, then the maximum sum they could be asked to pay would be the amount of the guarantee.

Related to this point is that a company limited by guarantee is a separate legal entity from the members involved in its management. This means that the company can make contracts to guy assets; lease property and employ staff.

A company limited by guarantee is regulated by the Companies Acts of 1985 and 2006. Such a legal framework means that grant giving bodies can be more inclined to provide funds to companies limited by guarantee than they would be to an unincorporated association.

Likewise, other public agencies often treat a company limited by guarantee as more secure than less formally structured associations.

The people who would get together to become shareholders in a normal private company become guarantors in a company limited by guarantee. A member has no obligation to provide money except to the extent of his guarantee, just once, in the event that the company becomes insolvent.

In many cases a liability limit of just £1 is set. Whatever the sum is, it will be specified in the memorandum & articles of association of the company.

A company limited by guarantee is organised democratically, with its members controlling the company and electing a management committee, who are often referred to as the Board of Directors.

How Does It Differ From A Company Limited By Shares?

Since there are no shareholders and no shares in a company limited by guarantee, a profit cannot be distributed to its members in the form of dividends. Any profit is retained to be used for the purposes, objectives and policies for which the company exists.

For example, if a company was set up to raise funds for medical research then any profits generated by the company must be used for that purpose.

Most companies have too many members for all of them to share practical day to day management. They therefore appoint some of their number to manage the company.

The members of a company limited by guarantee have periodic meetings, just like the members of a company with shares. Those meetings are where the most important decisions are made.

The structure of management, policy-making and decision making are set out in the articles of association, which can be changed if change is necessary.

Who Sets Up As A Company Limited By Guarantee?

Organisations that structure themselves as a company as limited by guarantee generally are run on a not-for-profit basis. You will find that charities are amongst the biggest users of this type of company set-up, along with schools, colleges, trade associations, social enterprises, societies, clubs and student unions.

Since returning profit to shareholders is not a function of a company limited by guarantee, the incentive for members is to commit to the purposes and aims of the organisation rather than for any personal gain.

Summary

Organisations which might benefit from setting up as a company limited by guarantee include:

• Charities;
• Voluntary Bodies;
• Social Enterprises;
• Trade Associations;
• Societies;
• Clubs;
• Professional Associations;
• Student Unions.

Some advantages of setting up as a company limited by guarantee are:

• Members' liability is set at a pre-agreed (usually low) amount;
• Company is a separate legal entity from its members;
• Company can own property in its own name;
• Company can employ staff;
• Company can engage in contracts;
• Can attract funding from certain types of organisation;
• Organised in a democratic manner for the good of the company.

Further Useful Information

If you are interested in setting up a company limited by guarantee then Net Lawman can help you with some of the documentation you will require.

The Memorandum & Articles of Association set out what the organisations aims and objects are and validate the powers it can use to advance such aims. The Memorandum & Articles of Association of a company limited by guarantee also provide the rules for the procedures that are to be used for meetings, voting rights and accounting practises at the company.

In addition, if the company limited by guarantee is to be registered as a charity then the Memorandum must meet the requirements of the Charity Commission.

Our Memorandum & Articles of Association document makes it simple to set out the company constitution that you will need to become a company limited by guarantee. More information can be found at: Memorandum and Articles of Association of Private Ltd Company: Limited By Guarantee.