Telling the truth about SME life today

What Is A Company Limited By Guarantee? 

company limited by guarantee

A company limited by guarantee refers to a type of company structure that is often used by non-profit and charitable organisations.

The structure provides the organisation with the benefits of operating like a company in terms of legal status and protections but without the need for shares or owners. In place of shareholders, member-guarantors promise to pay a small amount of money (the guarantee) if the company has debts that it is unable to settle.

The guaranteed amount ensures that nobody is asked to pay more than the agreed amount should the company fall into financial difficulty and need to be wound up in debt owing. Profits are put back into the company and not distributed to the members.

How To Set Up A Company Limited By Guarantee

Set up

The process of setting up this type of company is very similar to other types of company in that it must be registered with Companies House, have directors appointed and meet financial and compliance filing obligations each year.

When registering with Companies House, articles of association must be drawn up with at least one director and one member appointed. There can be more people appointed in either role, but the people appointed must be aware of their legal duties and obligations under any role that they take on.

As part of the registration, a registered address must be recorded. This must be a physical address that will be on public record and filing needs must be completed each year including; articles of association, confirmation statements, annual accounts, annual returns and tax records. The balance sheet of the accounts will show reserves instead of shareholder funds because none exist in this type of company structure.

Membership Structure

As mentioned, there are no shares available for distribution in a company limited by guarantee. This is because as a non-profit organisation, capital is brought into the business through funding, grants and donations.

Instead of shareholders, members as guarantors are selected and they have the role of covering liabilities up to a pre-set amount. The liability amount is usually set very low at around £1 per member, but can be more if needed. Members don’t own the company or have any rights to profits but are required to pay the total of their guarantee value in the event of insolvency.

Management Structure

Just like a limited company, there is a board of directors which will cover the day-to-day management and strategy of the organisation. All members of the company have voting powers and can elect the board at the annual general meetings based on the pre-defined membership terms.

The Legal Status and Liabilities of A Company Limited By Guarantee

The company exists as a separate legal entity from its members which means the company is fully accountable for its debts and contractual liabilities. This type of business structure distances the members from business claims relating to debts and means that only assets owned by the company can be pursued by creditors in the event of insolvency.

For example, if legal proceedings were brought against the non-profit for non-payment of debts, members cannot be chased for payment to settle the debts. Their cars, homes, and personal property are all protected from the business and their liability is capped at the guarantee amount unless misconduct or negligence can be proved.

This type of limited liability is similar to what shareholders enjoy in a limited company structure. Their losses are also limited to the value that they have invested. The difference between the two structures is that non-profit members do not get to enjoy a share of profits made by the company due to the public serving or charitable nature of the work delivered by the company.

How Do The Finances Work?

In a non-profit organisation, profits made by the company’s activities are reinvested back into the business to deliver against its mission and programs for the benefit of the communities and projects that it serves.

The money that comes into the business will be through grants and donations. These could be from individuals or foundations. Some non-profit organisations also have a membership base that pays reasonable fees to generate income. Any goods and services sold by the business can also provide income – a popular option is a gift shop or cafe attached to large charity brands. The only caveat here is that sales must align with non-profit purposes.

There are tax advantages available for non-profit companies. This means they can apply for Government-backed tax exemptions, reduced rates or credits that reduce the amount of corporation tax that they need to pay, therefore increasing the amount of money available to reinvest back into their endeavours. Quite often, this type of company can also benefit from reduced costs in other areas such as purchases with discounted rates applied for charities.

Pros and Cons of Using Limited By Guarantee Company Structure

Whilst briefly touched on already, the benefits of a limited-by-guarantee company include limited liability for members, non-profit status, tax relief, flexibility in structure and independent legal status.

  • Members of the company get limited liability protection to the amount of their guarantee amount which means their assets and wealth are protected from debts and claims.
  • As an incorporated entity the company can enter contracts, sue others or be sued in its own right.
  • Its non-profit status means money made is reinvested to the social missions the company supports, rather than being distributed to members or shareholders.
  • This type of company’s non-profit status brings tax reliefs and other discounts/exemptions that can be used to lower its spending and help budgets go further.

The more challenging side of this company structure includes an increased administrative burden, financial challenges and public perception issues.

  • There is a lot of paperwork involved in the compliance, management and reporting side of things for non-profit organisations. They must publicly share their financial statements and act in the best interests of the causes they support at all times or face public scrutiny.
  • It can be difficult to set up a non-profit organisation as it’s harder to secure start-up funding. These financial challenges also persist in the day-to-day operations as capital cannot be raised by issuing shares like in limited companies. This means that income streams must be carefully planned.
  • Non-profit organisations can sometimes be misjudged by the public as being smaller, underfunded or amateurish but this is not the case. Some of the biggest companies in the world are non-profits and so leaders of the company must actively manage these perceptions and the limitations that they can bring.

Types Of Organisations Using This Business Model

The company limited by guarantee business structure can be used for a wide variety of organisations that can benefit from having a formal company structure, non-profit status and the limited liability it offers.

You will see this type of company in corporate, public and community settings as the following types of guarantor companies illustrate:

Charities and Nonprofits

Charities, public foundations, think tanks and advocacy groups that work towards environmental, social, scientific or community service missions can use this company set-up whilst enjoying non-profit status and limited liability.

Membership Bodies

Member-driven bodies can benefit from incorporation and limited liability for members. Examples include amateur sports clubs, alumni associations, co-operatives and chambers of commerce/trade association type groups. The guarantor set up formalises the association whilst retaining member participation rights.

Community Organisations

Community groups and organisations rely on volunteers to run and the formal guarantee company structure allows them to manage the clubs within a formal legal standing that protects their volunteer member liabilities. Examples include music or cultural societies, health groups, art collectives and sports clubs.

Professional Trade Bodies

There are plenty of organisations set up to uphold professional standards and enforce compliance in industries. For example the GMC, General Medical Council, The Institute of Chartered Accountants (ICAEW) and The Law Society. Each of these organisations can formalise their efforts under the guarantor business structure whilst retaining a democratic non-profit structure centred on duty to public members over shareholders.

Governance Considerations

This type of company will have a board of directors that can serve for multiple terms if re-elected. The rules for the election of directors will be set out in the company’s official Articles Of Association – which is one of the important governing documents for its members.

Company members can vote for directors and other big decisions at annual meetings. The board of directors needs to be elected with their ability to protect the mission and values of the company, not just profit-making ability. Each director has a legal duty to act in a way that protects members’ interests and upholds ethics, care and transparency.

Growth And Evolution Of Nonprofits

As the company grows, so does its responsibility and paperwork. With this in mind, the board of directors needs to plan strategically to ensure it’s still able to deliver everything it wants the company to do and find ways to improve these goals further as time and budget allow.

During this process, the articles of association that were set up during the inception of the company may need to be updated along the way. This could be to allow for new income sources or new programs to be delivered. Leaders of this type of company must balance reporting standards, and regulations with their need to grow whilst remaining true to the non-profit model.

Accreditation and Accountability Are Key

Due to the public nature of nonprofits and their reliance on public funding, accreditation and accountability are very important qualities that must exist at all levels of their operation.

Whilst annual tax and company filing needs to ensure legal compliance, independent audits every few years ensure that the reported activities match the articles of association promises.

Members of these organisations are often also part of external groups like the Charity Commission Review to further boost accreditation and accountability.

Frequently Asked Questions

Do Members Hold Any Ownership Stake In The Company?

No, members are guarantors rather than owners. They have no property rights or stake in the company’s assets.

What Happens If a Guarantee Company Wants To Dissolve?

Just like any registered company, they must follow a formal dissolution process. This would include paying creditors, distributing assets as outlined in the articles of association, filing paperwork and removing the business from Companies House.

Do Directors Get Paid In A Company Limited By Guarantee?

Directors of these types of organisations are often unpaid volunteers in smaller companies but in larger ones, directors are likely to get a salary in line with their duties, the size of the company and what others in that sector are typically paid. There may be a cap on salary to ensure profiteering.

Can This Structure Be Changed Into A For-Profit Company?

In theory yes, but it is a complex process to transition from a non-profit guarantor company to a for-profit private company limited by shares that shouldn’t be undertaken lightly.

Summary

A company limited by guarantee can be a great structure for nonprofits and charitable organisations that want to benefit from the formal structure that incorporation offers whilst retaining their community-purpose focus.

The key differences between a guarantor company and a limited company are that member guarantors are in place rather than shareholders and that profits are reinvested back into the business rather than distributed to shareholders.

Trending

Topic

Related Stories

More From

Most Read

Trending

If you enjoyed this article,
why not join our newsletter?

We promise only quality content, tailored to suit what our readers like to see!