What is a Company Limited by Guarantee?

In the world of business, the term ‘limited company’ often brings to mind profit-driven organisations with shareholders and dividends.

But did you know that there’s an alternative type of limited company specifically designed for non-profit purposes? Introducing “what is a company limited by guarantee”, a unique business structure that provides protection from personal liability, stability, and trust, making it the ideal choice for non-profit organisations.

Read on to discover the ins and outs of this fascinating business model.

Short Summary

A company limited by guarantee is a UK non-profit organisation that must register with Companies House.
It has no share capital and its members are referred to as guarantors, while also having the potential to remove the word ‘Limited’ from its name for increased appeal.
This type of business offers protection from personal liability, stability and trust for investors/supporters, tailored needs of non-profits & advantages over other structures.

Understanding a Company Limited by Guarantee

A company limited by guarantee is a UK non-profit organisation, managed by one or more guarantors and directors, who are responsible for its debts and generate income for non-profit objectives.

This type of private company, is designed to serve various purposes, from charities and sports clubs to membership organisations and community projects.

They are required to register with Companies House, and their separate legal entity structure is outlined by the company’s articles.

Key Features

One of the most striking features of a company limited by guarantee is the absence of share capital. This means that the company does not issue shares to raise capital, and its members are called guarantors rather than shareholders.

These guarantors agree to contribute a nominal amount of money should the company become insolvent.

Another interesting aspect of this business model is that, unlike most companies, it can be exempt from having the word ‘Limited’ at the end of its name, as long as certain conditions are met.

This can make the company appear more approachable and less profit-driven to the general public.

Legal Structure

The legal structure of a company limited by guarantee includes a memorandum of association, which outlines the purpose, powers, rights, and duties of the company and its members.

Additionally, an article of association defines the internal management of the company, including its objectives, powers, and the rights and duties of its members.

To register the company, the memorandum and articles of association must be submitted to Companies House, along with any other necessary documents.

Upon approval, the company is officially registered and can commence operations.

Directors and guarantors play important roles in the success of the company, with directors managing daily operations and guarantors ensuring the company fulfills its financial commitments.

Formation and Registration Process

The formation and registration process of a company limited by guarantee involves submitting the memorandum and articles of association with Companies House.

The company name, registered office address and directors must be provided for registration. Company secretary (if applicable) and members are also necessary. At least one guarantor and one director are essential, along with a physical address for the company.

Details regarding individuals with significant control (PSCs), who generally are the directors and guarantors, should also be provided.

Registering with Companies House

To register with Companies House, you must submit form IN01 and the associated £40 fee via post. If you are already registered with the Companies House WebFiling service, you may use the Web Incorporation Service to complete the registration process.

A minimum of at least one director and one guarantor is required for registering a company limited by guarantee. Registering your company is a crucial step, as it grants your organisation a legal identity and allows you to operate within the legal framework.

Choosing Directors and Guarantors

Selecting the right directors and guarantors is integral to the success of your company limited by guarantee. The members of the company typically undertake the selection process and decide who will be the directors and guarantors.

Directors of a limited company have limited liability, meaning they are not made personally liable or accountable for the company’s debts, except in cases of fraud.

Guarantors, on the other hand, hold overall control of the company, similar to shareholders in a share company, and are responsible for ensuring the company meets its financial commitments.

Roles and Responsibilities within a Guarantee Company

A guarantee company is composed of various key players, each with their own set of roles and responsibilities.

Directors are responsible for managing the company’s operations on a daily basis and paying company debts, while guarantors are obligated to contribute to the company and guarantee a sum of money in the event of debts or insolvency.

Persons with significant control (PSC) are individuals shares companies who have a considerable influence or control over the company.

Directors

Directors of a company limited by guarantee are responsible for ensuring that the company complies with its obligations relating to the health, safety, and welfare at work of its workers.

Additionally, directors are responsible for making strategic decisions, overseeing the wellbeing of employees, and ensuring the company complies with all its statutory obligations.

To fulfill their roles, directors must adhere to the duty of care, the duty of loyalty, the duty of obedience, and the duty of disclosure.

Directors are appointed by the relevant supporting bodies, such as local authorities one or more members of particular interest groups, and may receive a salary.

Guarantors

Guarantors are individuals or corporate bodies who agree to become members of a company limited by guarantee, undertaking to contribute a fixed sum of money (a ‘guarantee’) in the event that the company is unable to settle its liabilities. They also play a significant role in key decisions concerning the company’s management.

Guarantors contribute to the company in the very same way and manner as other members, and their level of financial liability is determined by the amount they have agreed to guarantee.

Persons with Significant Control (PSC)

Persons with significant control (PSC) possess control over the company and have the authority to exercise influence or control over its operations. They are typically the directors and guarantors of the company, and play an important role in its overall management and direction.

PSCs may be obligated to fulfill certain disclosure and reporting requirements, to ensure transparency and compliance with regulations.

Financial Aspects of a Company Limited by Guarantee

Managing the financial aspects of a company limited by guarantee is crucial for its success and sustainability.

This includes understanding the various funding options available, adhering to taxation and compliance regulations, and navigating the complexities of profit distribution and charitable status.

Funding Options

A company limited by guarantee may receive funding through various sources such as endowments, grants, subscriptions, and fees.

However, due to the inability to issue shares in exchange for investment capital, a company limited by guarantee may experience greater difficulty when attempting to fundraise.

Despite these challenges, guarantee companies often receive strong support from funding bodies and community members, who recognise the value of their non-profit objectives and are eager to contribute to their success.

Taxation and Compliance

Companies limited by guarantee must fulfill their obligations to file accounts at Companies House, submit annual returns, maintain proper accounting records, appoint directors in accordance with the relevant regulations, and file returns with HMRC.

If registered with the Charities Commission and HMRC, a CT600 is likely not required and no corporation tax will need to be paid.

However, the company must still adhere to the disclosure requirements and rules set out by the Charity Commission, the Charity SORP, and applicable charity legislation.

Profit Distribution and Charitable Status

While guarantors are eligible to receive a portion of a company’s profits, it is not a frequent occurrence as most companies limited by guarantees are established for not-for-profit purposes.

The business functions on a non-profit basis, hence the profits that are earned are reinvested into it. This helps finance the company achieve its not-for-profit activities.

Profits distributed to owners disqualify the company from applying for charitable status. This means the same company profits won’t be eligible for such benefits.

Common Uses and Benefits of a Company Limited by Guarantee

A company limited by guarantee offers numerous benefits, making it an attractive option for various types of non-profit organisations.

These benefits include protection from personal liability for debts, stability and trust from investors and supporters, and suitability for non-profit organisations rather than businesses for personal gain.

Advantages over Other Structures

Compared to other business structures, a company limited by guarantee has several advantages, including limited capital, daily operations financed by members, and profits being reinvested.

This structure can promote trust and confidence among customers and investors due to its professional credibility and the safeguards it provides for members against financial risk.

Examples of Guarantee Companies

Organisations such as charities, sports clubs, and NGOs commonly operate as limited guarantee companies. Cricket Australia, workers’ co-operatives, and residential property management companies are just a few examples of companies limited by guarantee.

These organisations benefit from the unique features of the guarantee company structure, enabling them to focus on their non-profit objectives and serve their communities effectively.

Frequently Asked Questions

What is the meaning of a company limited by guarantee?

Company limited by guarantee refers to a business structure in which the shareholders or members are liable for a pre-determined amount of money should the company run into debt and cannot pay its creditors. This means that there is no need for share capital, and thus the company’s status as a non-profit organisation is secured.

Why use a company limited by guarantee?

A company limited by guarantee is an ideal business structure for people who want to establish a non-profit organisation. This business structure offers individuals involved in the organisation protection from personal financial liability while ensuring their assets are safe.

Moreover, this type of company ensures that all resources and profits generated remain within the organisation for its goals.

What is the difference between Ltd and limited by guarantee?

The main difference between Ltd and private company limited by guarantee is that limited by guarantee companies do not distribute profits to their members. Instead, the profits of the company are reinvested into the business or given to charity.

As such, limited by guarantee organisations have no shareholders.

What are the disadvantages of limited by guarantee?

The main disadvantage of a company limited by guarantee is the lack of access to capital through shareholders. This makes it difficult for the company to generate and raise funds for its operations.

Additionally, there are extra costs associated with setting up and managing this type of business structure.

Summary

In conclusion, a company limited by guarantee offers a unique and advantageous business structure for non-profit organisations.

With its protection from personal liability, stability, and trust, this model enables organisations to thrive and serve their communities effectively.

Whether you are considering establishing a charity, sports club, or community project, a company limited by guarantee could be the perfect fit to help you achieve your non-profit goals.

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