Typically used by not-for-profit organisations, a company limited by guarantee is very similar to one limited by shares, but with some important differences.
Why set up a guarantee company?
A guarantee company is a formal type of business structure which appeals mainly to non-profit organisations, charities, sports clubs, and other bodies where any profits made are typically reinvested for the benefit of the organisation.
- This type of company is set up and run by members, rather than shareholders.
- Forming a limited company provides security for the members who set it up, as well as the organisation behind it.
- Importantly, the liability of the constituent members is limited to protect their personal assets from claims against the company should things go wrong.
- The liability of members is limited to an amount stated in the company’s Articles – typically £1.
- Potential benefactors and partners are also more likely to feel comfortable working with a formal company rather than a voluntary unregistered organisation.
- Some funding and public sector bodies will only work with incorporated organisations.
What are the differences between a company limited by shares and one by guarantee?
There are strong similiarities between each type of limited company:
- Both are registered at Companies House in the same way.
- The liability for company’s debts is limited for members, unless in certain cases, such as if fraudulent activity has taken place.
- Both have the same annual reporting duties, e.g. filing annual accounts and a Confirmation Statement with Companies House.
- As a separate legal entity, the company can enter into commercial contracts and employ people.
- Any changes made to the company (e.g. change of a director’s details) must be reported to Companies House.
- Both are run by directors. Each company must have at least one director.
- Either type of company may decide to appoint a company secretary, although there is no legal requirement to do so.
- The finances of the company and its members/shareholders are entirely separate.
However, there are also a few – major – differences
- A company limited by shares has share capital and is owned by shareholders, whereas a company limited by guarantee has no share capital, and is owned by its members.
- Members don’t receive dividends (as shareholders do). They are more likely to be involved in the company for non-financial reasons.
- A guarantee company isn’t prevented from distributing any profits by law, however restrictions are typically written in to the company’s Articles of Association.
- A company limited by guarantee may decide not to use the suffix ‘limited’ or ‘ltd’ after the company name (as detailed in s.60 of the Companies Act 2006). This excemption is subject to certain qualifications.
What types of organisation would use a limited by guarantee company?
- Property management companies.
- Public sector bodies.
- Trade associations.
- Research bodies.
- Educational and religious institutions.
Who can be a guarantor?
A guarantor can be an individual or another organisation. If the company’s constitution allows it, minors can also become members.
How to register a company limited by guarantee
The steps you need to take are very similar to those used to form a company limited by shares.
You can register your company directly via Companies House, for a mere £12 fee. Or, you can use a formations agent or accountant if you would prefer a third party to take care of the formations process.
Before you start, make sure you have the following information to hand:
- Your proposed company name. It must be available, and follow certain rules. You can search the existing register of companies here.
- A registered company address (a physical address) based in the UK.
- Details of at least one director and one member (this can be the same person), including date of birth, nationality and occupation.
- Director(s) address(es) – you may also provide a ‘service address’ to protect your residential address. This will appear on the public record.
- Name and address of the company secretary (not a mandatory appointment).
- Up to 4 Standard Industry Classification (SIC) codes to describe what the company does.
- Information about any Persons with Significant Control (PSC).
- A statement of guarantee which states the amount of the guarantee provided by each member.
- Many companies limited by guarantee have custom-made Articles of Association which act as the company’s rule book. You will need to provide a copy when you register the company, unless you prefer to use ‘model’ Articles provided by Companies House.
- The Memorandum of Association is created automatically when you set up a company. This will contain the details of the company’s founding members.
- A useful summary (from a financial reporting perspective) from the ACCA.
- Download model articles of association for companies limited by guarantee (from Companies House).
- A good legal summary of the pros and cons of using a guarantee company (Orr Litchfield solicitors).
- Another solid legal summary (Harper James solicitors).