Imagine a world where organisations can operate without the pressures of generating profits for shareholders. A world where they can focus their resources on creating a positive impact in their communities.
This is the realm of ordinary private company law provisions and many such companies are limited by guarantee, a unique type of legal entity designed for not-for-profit organisations not for profit companies. But what is a private company limited by guarantee, and how do they differ from companies limited by shares? Let’s explore this fascinating area in depth.
- A private company limited by guarantee is a distinct legal structure for non-profit organisations providing members with limited personal liability.
- This type of company offers advantages such as increased credibility and protection. Drawbacks include higher costs and public financial information.
- The formation process requires specific documents to be submitted to Companies House, while the conversion or winding up processes must adhere to specified rules.
Understanding Private Companies Limited by Guarantee
A private company limited by guarantee is a distinct legal entity that comes into existence when non-profit organisations, such as charities, clubs, and associations, decide to incorporate.
Unlike an ordinary share company, it doesn’t have shares or shareholders. Instead, it has members who act as guarantors, similar to a club.
These members agree to guarantee the company’s debts up to a predetermined nominal amount, typically £1.
The primary intent behind incorporating as a private company limited by guarantee is to obtain registered charitable status or serve as a model for not-for-profit companies.
In a private company limited by guarantee, members don’t contribute capital while the company is operational.
However, if the company undergoes an insolvent winding up, they may be required to contribute to the company’s liabilities up to the predetermined amount specified in the Articles of Association, thus limiting their personal liability.
This unique structure provides a distinct advantage over share companies, as there are no shares to issue, and it’s straightforward for members to join and leave.
A private company limited by guarantee is a separate legal entity from its proprietors and is liable for its own liabilities.
The liability of its members is restricted to the amount they agreed to contribute in the event of the company’s dissolution. This type of company is the most such companies commonly employed by non-profit entities, social enterprises, and charities.
To form a private company limited by guarantee, the necessary information must be provided, and a Memorandum and Articles of Association must be drafted and registered with the appropriate authorities.
This legal structure is particularly appealing to non-profit organisations because it offers limited financial liability, the ability to reinvest profits within the organisation, and the capability to acquire funds without requiring significant capital.
Additionally, the absence of share capital, the incapability to pay dividends, and the requirement to adhere to the Companies Act 2006 are some of the drawbacks of employing a guarantee company.
A private company limited by guarantee operates similarly to a company limited by shares, but with some key differences. Instead of shareholders or share capital, the company is managed by members who serve as guarantors.
It must have at least one director and is considered a distinct legal entity from the profit company limited by members involved in its own management committee.
The Articles of Association of a company limited by guarantee outline provisions regarding the governance and management of the company, including the authority of directors, decision-making processes, director appointments, membership, general meetings, administrative protocols, and indemnity and insurance for directors.
These provisions ensure that the company operates in a manner consistent with its non-profit objectives while providing a clear framework for its management and operation.
Common Uses for Guarantee Companies
Guarantee companies are often utilised by non-profit entities, clubs, charities, community projects, societies, and other similar organisations to provide personal financial protection to business owners when entering into a lease, purchasing supplies, or hiring staff.
Examples of organisations that typically use the limited by guarantee structure include charities, various sports clubs and organisations, private member clubs, community projects, student unions particular interest groups, and political parties.
These organisations choose to use guarantee companies because they offer limited financial liability, the capacity to reinvest profits within the organisation, and the capability to acquire funds without requiring significant capital.
However, there are some drawbacks to using a guarantee company, such as the absence of share capital, the incapability to pay dividends, and the requirement to adhere to the Companies Act 2006.
Advantages and Disadvantages
One of the main benefits of utilising a guarantee company is that it is a legally recognised entity, which helps to establish credibility and stability for the organisation.
Additionally, being a separate legal entity means that the company is responsible for its own liabilities, thereby protecting the personal assets of its members and directors.
However, there are some drawbacks to employing a guarantee company. Firstly, the company’s financial information becomes part of the public record, which may be undesirable for some organisations.
Secondly, the process of establishing a guarantee company can be more costly compared to other organisational structures, due to the increased costs associated with registration and ongoing filing requirements.
Lastly, tracking members of a guarantee company can be challenging, as there is no requirement for a share register or share transfers like in a share company.
Formation Process of a Private Company Limited by Guarantee
To form a private company limited by guarantee, the initial guarantors (subscribers) must complete a Statement of Guarantee as part of the incorporation process.
The company must provide a distinctive name, specify the “type” of non-profit company, list the purposes for which it is being established, and appoint at least one director and one guarantor.
Furthermore, the company must submit a Memorandum and Articles of Association to Companies House for registration.
The Memorandum of Association outlines the members’ intention to form a company, become members, and the amount of the guarantee.
The Articles of Association contain provisions regarding the governance and management of the company, such as qualifications for membership, the application process, and procedures for terminating membership.
These documents form the basis of the company’s legal structure and provide a clear framework for its management and operation.
When forming a private company limited by guarantee, it’s necessary to provide specific information, such as the names and addresses of the directors, guarantors, company secretary, and persons with significant control.
Additionally, the company name, registered office address, statement of guarantee, and Standard Industrial Classification (SIC) code must be included.
A minimum of one member (guarantor) and one director is necessary, and the initial guarantors must complete a Statement of Guarantee during the incorporation process.
This information is essential in ensuring that the company is properly formed and complies with all legal requirements.
Memorandum and Articles of Association
Memorandum and Articles of Association play a crucial role in the formation of a private company limited by guarantee.
The Memorandum outlines the members’ intention to form a company, become members, and the amount of the guarantee. It serves as a declaration of their agreement to become a member of the company and provides a record of their commitment.
The Articles of Association, on the other hand, delineate the management and governance of the company, including the authority of directors, decision-making processes, director appointments, membership, general meetings, administrative protocols, and indemnity and insurance for directors.
These provisions help establish a clear framework for the company’s management and operation, ensuring that it functions in a manner consistent with its non-profit objectives.
Membership and Ownership in Guarantee Companies
Membership in guarantee companies is open to legal persons, including individuals, companies, and Limited Liability Partnerships (LLPs). Minors may also become members, depending on the provisions outlined in the Articles of Association.
The initial members of a company limited by guarantee are those listed in the Memorandum of Association upon incorporation.
Ownership in guarantee companies differs from share companies, as these organisations do not have shareholders that possess the company’s assets.
Instead, the company’s debts is managed by members who serve as guarantors, providing a level of both financial support and protection to the organisation while enabling it to focus on its non-profit goals.
Members’ Roles and Responsibilities
To become a member of a guarantee company, an individual must complete a membership application form and have it approved by the directors.
Once approved, they are accepted as a member and their details are added to the register of members, which serves to document membership organisations, the addition of new members and the removal of those who are no longer part of the company.
Membership in a guarantee company comes with certain responsibilities. Members may formally withdraw from the company with seven days’ written notice and their membership will be terminated upon their death (in the case of an individual) or dissolution (in the case of other legal persons).
A member must give written notice of their intention to withdraw from the company seven days prior to doing so, as outlined in the model articles. This is non-negotiable and must be strictly adhered to.
Directors’ Roles and Responsibilities
Directors in a guarantee company are responsible for managing the company, making strategic decisions, the management committee overseeing the well-being of the company law provisions relating to employees, ensuring the company meets all its statutory obligations, and acting in good faith and in the best interests of the company.
Furthermore, they have a personal responsibility to ensure that all necessary documents are submitted to Companies House in a timely manner.
The Articles of Association will include regulations concerning general meetings and the appointment, termination, and remuneration of directors. These provisions ensure that the company operates in a manner consistent with its non-profit objectives while providing a clear framework for its management and operation.
Financial Aspects of Private Companies Limited by Guarantee
Companies limited by guarantee may generate income from various sources, such as membership fees, grants, donations, and other revenue-generating activities.
Expenses associated with running the company may include salaries, rent, and other operational costs.
To meet these financial obligations, guarantee companies can acquire funds without issuing shares through borrowing, debenture issuance, grant and donation acquisition, and membership fee collection.
Profits in limited by guarantee companies are typically reinvested to further the company’s objectives or allocated for charitable purposes.
However, it is possible to distribute profits to members at the expense of losing charitable status. In this case, the company must adhere to any such restrictions as outlined in its Articles of Association.
Private companies limited by guarantee can source funds through personal savings, loans from directors and their relatives, bank loans, private equity provided by angel investors and venture capitalists, endowments, grants, subscriptions, and fees.
They have the option to borrow money and issue debentures or debenture stock as a loan. This is often done when additional funds are required for a business’ activities.
These sources of financing allow guarantee companies to cover their operational costs, such as salaries, rent, and other expenses, without the need for issuing shares.
This flexibility enables guarantee companies to focus on their non-profit objectives while maintaining financial stability.
Profits in limited by guarantee companies are typically reinvested in the company or allocated for charitable purposes. This ensures that the company continues to operate in a manner consistent with its non-profit objectives and maximises its own profit making business positive impact on the community.
However, profits can also be distributed to one or more members themselves, although this would result in the forfeiture of charitable status. If the company’s Articles of Association forbid profit distribution, the company must adhere to these restrictions when handling profits.
Converting and Winding Up Guarantee Companies
Converting a company limited by guarantee to a company limited by shares is not a straightforward process, as there is no statutory procedure for re-registering a company limited by guarantee to a company limited by shares.
The most common approach is to establish a new share company and transfer the assets of the guarantee company to it.
Winding up a private company limited by guarantee requires a special resolution from the company’s members, with a minimum of 75% of members voting in favor of the resolution to wind up.
The company’s assets must be liquidated, and any remaining funds distributed according to the provisions outlined in the company’s Articles of Association.
As mentioned earlier, the most straightforward approach to convert a guarantee company into a share company is to establish a new share company and transfer the assets of the guarantee company to it.
This process requires the registration of a new company with a distinct name and the execution of a business or asset sale agreement to facilitate the transfer of assets.
It’s essential to carefully consider the implications of converting a guarantee company into a share company, as this may impact the company’s non-profit status and its ability to continue pursuing its objectives.
Additionally, the conversion process can be costly and time-consuming, so it’s crucial to weigh the benefits against the potential drawbacks.
Winding Up Procedure
In order to wind up a private company limited by guarantee, a resolution for members voluntary winding up of the company must be passed by the company’s members, and the company’s assets must be liquidated.
This process typically involves the appointment of a liquidator, who is responsible for collecting the company’s assets, settling its liabilities, and distributing any remaining funds according to the provisions outlined in the company’s Articles of Association.
It’s important to note that specific procedural rules must be followed during the winding-up process to ensure compliance with the law.
Failure to adhere to these rules can result in legal consequences for the company and its directors, so it’s essential to seek professional advice before proceeding with the winding-up process.
Comparison: Private Companies Limited by Guarantee vs. Companies Limited by Shares
While both private companies limited by guarantee and companies limited by shares are popular structures for organisations, there are key differences between the two.
In terms of liability, members in a company limited by guarantee are liable to the extent of their guarantee, while members of a company limited by shares are liable for the full amount of their shares.
Capital contributions also differ, as companies limited by guarantee do not necessitate capital contributions particular directors, while companies limited by shares require capital contributions from shareholders.
In terms of asset ownership and company name, companies limited by guarantee do not have shareholders that possess the company’s assets and must include the phrase “limited by guarantee” in their name.
On the other hand, companies limited by shares have shareholders who own the limited company itself’s assets and must include the phrase “limited by shares” in their name. Lastly, guarantee companies offer membership to individuals, whereas ordinary share companies apply offer shares to shareholders.
In summary, private companies limited by guarantee are a unique and flexible legal entity that offers numerous benefits for non-profit organisations.
They allow these organisations to focus on their objectives and create a positive impact in their communities, while providing a stable legal structure and limited financial liability for their members and directors.
If you’re considering establishing a non-profit organisation, a private company limited by guarantee may be the perfect solution for your needs.
Frequently Asked Questions
What is the difference between a private company and a company limited by guarantee?
The major difference between a private company limited by company status and a company limited by guarantee is that the latter does not have any shareholders, but members who control it instead.
The company limited by guarantee must still register its accounts and an annual return each year at Companies House, much like a regular private company.
What is an example of a private company limited by guarantee?
An example of such a committee or private company limited by guarantee is Bupa, the global healthcare provider. This company follows the same structure as charities and property management companies, where profits are used to finance contracts that benefit the company.
As the largest company of its type, it serves millions of customers in over 190 countries.
What are the disadvantages of a private company limited by guarantee?
Running a private company limited by guarantee involves significant financial and legal responsibility, as members are personally liable for the otherwise ordinary private company limited’s debts even if the company becomes insolvent. Furthermore, members do not receive any dividends or rights to profits as there is no share capital.
In addition, appointing directors can be complicated due to the lack of shareholders with voting rights. Consequently even all the directors, it may be difficult to make quick decisions.
In conclusion, private companies limited by guarantee are an ideal solution for non-profit organisations seeking a stable legal structure, limited financial liability, and flexibility in raising funds without issuing shares.
While there are some drawbacks to using this structure, such as increased costs and public record requirements, the benefits far outweigh the downsides for many organisations.
With a clear understanding of the formation process, membership and ownership responsibilities, financial aspects, and the intricacies of converting and winding up most guarantee companies into limited companies themselves, you’re now well-equipped to make an informed decision about whether a private limited company status or limited by guarantee is the right choice for your organisation.