What are the advantages and disadvantages of a company limited by guarantee?

This article is going to let you understand what this form of company formation is. You will also learn about the advantages, disadvantages, and requirements to start this company structure. 

What is a company limited by guarantee? 

According to the law in the UK, Singapore, Australia, Bermuda, and Ireland, a company limited by guarantee (CLG) doesn't have share capital and shareholders. Sometimes this type of business is referred to as a non profit organisation.

The company is owned by guarantors or members who guarantee a specified capital to the charity when on the verge of being insolvent. Accumulated profit from the trading community is used to achieve the charity’s objectives without paying it to directors. 

The financial liability of the members is limited to their guarantee amount requirement set in the company’s articles of association. Directors of a company limited by guarantee offer important advice regarding management decisions.

Who can be a member in a company limited by guarantee?

Members of this company are guarantors who make important ideas and their liability is limited to their capital. The company is ideal for non-profit organisations and charities. An individual, group of people, or other organisation can be a legal member of this company. 

There are no restrictions based on age, or qualifications unless you find them in the company’s articles of association. Nonetheless, anyone can become a member as long as they fulfill decision-making and financial obligations to the company. 

Setting up this company requires one member and a director unless stated in the articles of association. The community doesn’t have a maximum number of members. One person can be the guarantor and director to form a company limited by guarantee. 

Other common industry uses of a company limited by guarantee include:

• Clubs
• Sports associations
• Membership organisations
• Workers’ cooperatives 

What are the advantages of a company limited by guarantee?

Here are the benefits to register this form of company. 

Employee Commitment

Members in a charity organisation have personal interest and commitment to supporting the cause of the company. The company benefits from employing people interested in contributing to its cause.

Every member believes in the company’s mission, values, and philosophy. People with a personal interest in the company limited by guarantee usually have a better understanding of its corporate structures and processes. 

Intrinsic Rewards

Charitable organisations offer an essential service to the public and needy in society which is usually overlooked. It’s virtually impossible to determine the tangible benefits of companies limited by guarantee on people who need help.

The charitable organisation and its members benefit intrinsically from the satisfaction that comes with helping needy people within their society. Working for the organisation is a free form of giving back to society without financial benefits for many of its employees. 

Benefit From Tax Relief And Exemptions

Charities don’t pay taxes when using the money for social causes. A charity organisation can claim back any tax deducted such as on donations and bank interest. Non profit companies are eligible for various tax exemptions according to the law. 

Only those that engage in commercial trading and generate profits exceeding the VAT registration threshold have to register for VAT like other private businesses. 

Limited Guarantee

Members in a company limited by guarantee have liability to their guaranteed amount. There’s protection of personal property from the company’s debts, fines, and lawsuits. Personal property can’t be attached by business creditors.

What are the disadvantages of a company limited by guarantee? 

Here are the cons if you registered a non profit organisation.

Limited Access To Capital

Non profits can’t raise capital through shares in the company. Funding is a big problem, especially when the business is facing economic downtimes. The private company may be forced to discontinue its services when it doesn’t have appropriate funding. 

Acquisition of funds is through grants and auctions or donations not selling shares. These may be hard to come by in different situations. 

Prone To Social Backlash And Scandals

Not for profit companies may be victims of social backlash and scandals. This may happen if the public believes its activities are extreme, against social norms, or are based on extremist beliefs. 

Religious charities whose actions are deemed to incite violence are usually barred from carrying out their activities by authorities. 

Exposed To Public Scrutiny

There’s a privacy issue in non profit companies. Their financial statements must be available for public viewing. It may encourage negative criticism when facing financial and administrative challenges. 

The charitable organisation must hire a third party auditor to ensure compliance with industry best practices and tax compliance.