What is a company limited by guarantee?

What is a company limited by guarantee?

A company limited by guarantee (also known as CLG) is a company that has members acting as guarantors rather than shareholders. These companies are also called Guarantee or Charitable Companies. Each guarantor agrees to pay a nominal amount of money or guarantee value, as indicated and set in their memorandum or articles of organisation or association, in case of bankruptcy or if the company goes under. These types of companies, most often but not always, are non-profit organisations or charities.

The guarantors of the company may opt to share the profits made by the company; in which case they would not be able to present their company as a charitable organisation. Otherwise, a guarantor does not get paid a salary or dividends. The profits usually go back into the business to be repurposed. Hence, companies limited by guarantee are not profit-oriented, rather they are formed to render services to the community.

Examples of these kinds of companies are workers’ cooperatives, clubs, non-governmental organisations, and sometimes political parties. For example, the UK Independence Party is a guaranteed limited company. Some financial organisations in the UK known as the Big Four are also limited by guarantee, i.e., KPMG, Deloitte, PriceWaterhouseCoopers, and Ernst & Young. Some law firms like the Anglo-Canadian and Anglo-American law firms use this kind of structure too.

What are the types of limited liability companies limited by guarantee?

There are two types of companies limited by guarantee – one with share capital and the other without.

The guaranteed limited company with share capital is usually incorporated with some capital from the members. In other words, it kind of operates like the shareholding company except that once it begins operation, it continues to fund itself from profits made and working funds can be obtained through fees, charges, and subscriptions. Voting power in this kind of company is determined by the number of shares. Although, since the enactment of the Companies Act 2006, it is no longer possible to incorporate guarantee or charitable companies with share capital.

The other form of guarantee limited company is the most common which is without initial share capital. Here, starting funds are sourced from grants, endowments, fees, and subscriptions. The members or guarantors cannot put down the starting or working capitals themselves; has to be sourced outside the company, e.g., government grants or donations from the public. Voting power is determined by guarantee.

What are the attributes and benefits of a company limited by guarantee?

• Like any other limited liability company, a CLG is a legally distinct entity from its guarantor(s) and hence responsible for its liabilities like debts, law suits, or insolvency.
   
• Since a director can also be the guarantor, it is thus possible for a single person to start and direct a guarantee company.
   
• If the CLG is set up for the promotion of art, education, science, religion, commerce, charity, or any other type of profession, it can be exempted from including Ltd in its name.
   
• Being a limited liability company, the company is seen as stable and trustworthy which helps it to garner support from its clients and the public.
   
• Every member has equal control in a company limited by guarantee unlike in a shareholding company where the person with the highest number of shares has controlling power.

What are the difference between a company limited by guarantee and that limited by shares?

There are some differences in their formation, accounting, and organisation

1. No initial shares from the members or guarantors in a guarantee company.
    
2. The memorandum and articles of association will define the company’s objectives in addition to a clause that prevents the members from sharing profits made by the company in the guarantee limited company.
    
3. Instead of the bottom section of the balance sheet of their account book to be termed “shareholders’ funds” as in the case of the shareholding company, that of the CLG will be termed “Reserves”.
    
4. Members get paid remunerations and not dividends because there are no shares where dividends can be obtained from.
    
5. Charitable companies can have trustees who can also receive payments subject to some rules and laws.
    
6. If the guarantee company is a charity, then it must adhere to the disclosure requirements of the Charity Commission, Charity SORP, and Charities Acts.

How to incorporate a company limited by guarantee?

Incorporating a company limited by guarantee means you have to register with Companies House and HM Revenue and Customs (HMRC) for tax payment. For this you need

• Company name
• Company registered office address
• Name of director(s) and company secretary (if any)
• Name of members
• Memorandum of association and articles of association

Note that if your company is registered with the Charity Commission, it may not be required to pay corporation tax via the CT600 form to the HMRC.