Business Development

What Is A Limited By Guarantee Company?

Cameron Fleming | 29 August 2022 | 2 years ago

limited by guarantee

A limited by guarantee company is one that has no shared capital. Instead, the members of the company agree to contribute a set amount of money in the event that the company is wound up. This is particularly useful for non-profit organisations as it protects the members from being liable for more than they have agreed to contribute.

But what are the other advantages of a limited by guarantee company? And is it the right choice for your business?

In this article, we will discuss the key features of a limited-by guarantee company and why setting up this company status might be right for you. We will also look at some of the benefits and risks associated with using this structure, including the restrictions on profit and how profits are distributed.

What Are The Features of a Limited By Guarantee Company?

A limited by guarantee company is a business structure which means your company doesn’t have share capital. This means that there are no shareholders and no director’s dividends are paid out of the profits. Instead, the members all pledge to put in a certain amount of capital if the company ends up being wound up. This means that each member will only have to contribute the amount they pledged and will protect them from further liabilities.

There are a few key things to remember about limited by guarantee companies:

  • They do not have shared capital
  • They have no shareholders
  • The members agree to contribute money if the business fails
  • Owners and members have a lot of control over how the company is run
The majority of limited by guarantee companies are non-profit, and the reason for this is because profits are retained within the company, rather than handed out to members.

company structure

Advantages of a Limited By Guarantee Company

There are a few key benefits to using a limited by guarantee company structure.

Operational Control

The main reason for many people is because they want to remain in control of their company and its future endeavours. With no shareholders to answer to, members have more jurisdiction over how the company is run and the direction it takes. This can be particularly useful if you are setting up a small business with a close-knit team and you want everyone to have a say in how the company operates. Limited by guarantee companies often have more relaxed rules and regulations than other types of businesses and this can make them much easier to run.

Flexible Profit Distribution

Additionally, limited by guarantee companies often have more flexibility when it comes to distributing profits and can better align themselves with their social or environmental goals. This makes them ideal for non-profit organisations or social enterprises as profits can be reinvested back into the company or used to achieve its charitable objectives.

Disadvantages of a Limited By Guarantee Company

Of course, there are also some risks associated with using this type of company.

Debt Liability

The main one is that members may be held liable for the debts of the company if it is wound up. This risk is mitigated, however, by having an agreement on how much each member will contribute if such an event occurs. Usually, the personal assets and finances of members are protected, and they will only be responsible for paying company debts up to the amount initially agreed upon.

Lack of Financial Visibility

Another disadvantage is that they often have less visibility than other types of businesses because they are not required to file accounts with Companies House. This can make it difficult for members to keep track of the company’s financial situation and can therefore it harder to attract investors and customers, potentially limiting the company’s growth. Having said that, the ‘Limited’ status can lend itself to the company’s credibility and instil trust and assurance amongst clients and investors.

Do Limited By Guarantee Companies Have Directors?

Yes, while limited by guarantee companies don’t have shareholders, they do have directors but they are not paid out of the profits and do not have any shares in the company. Limited by guarantee companies must have at least one director, but many have several on a board to provide support. Their role in the company is to manage its affairs and make sure that it is run in accordance with the law. They generally have a broad scope of powers and duties and are ultimately responsible for the direction and health of the company.

What is a Guarantor?

A guarantor is a member of a limited by guarantee company who agrees to contribute a set amount of money if the company is wound up. This ensures that there are funds available to pay off any debts of the company. Any corporate establishment or person can be a guarantor and all guarantors have equal rights to the company.

What Restrictions on Profit do Limited By Guarantee Companies Have?

Limited by guarantee companies often have more flexible rules when it comes to distributing profits and this means that they can spend their profits wherever they want. However, they do face some restrictions on exactly how they can use their profits. For example, they will not be able to distribute profits to members, but instead, profits will be absorbed into the company itself.

Profits in a limited by guarantee company are usually put back into the company or used to achieve its charitable or social aims. This is why many non-profit organisations are structured as limited by guarantee companies.

When Is Limited By Guarantee Used?

The limited by guarantee structure is often used by small businesses and non-profit organisations, however, it can be used by any type of company. Membership organisations and sports associations also find this type of company beneficial because they are not usually trying to turn a profit but rather to function for their members. Due to the distribution of profits in a limited by guarantee company, it is less likely to be used by a normal trading business as profits cannot be issued by way of a dividend.

Limited By Guarantee vs Limited by Shares

The main difference between a limited by guarantee company and a limited by shares company is that shareholders have limited liability in a limited by shares company whereas members have unlimited liability in a limited by guarantee company. This means that shareholders are only liable for the amount of money they have invested in the company, whereas members may be liable for the debts of the company if it is wound up (to the extent they pledged initially).

Another difference is that directors in a limited by shares company are usually paid out of profits whereas directors in a limited by guarantee company are not. This is because there are no shareholders in a limited by guarantee company and therefore no dividends are paid out.

Finally, limited by shares companies often have more restrictions on how they can distribute their profits than limited by guarantee companies. This is because shareholders need to be taken into account when distributing profits and they may not be happy if all of the profits are reinvested back into the company.

Can I Change my Limited By Guarantee Company to a Limited by Shares Company?

If you are contemplating converting your limited by guarantee company to a limited by shares company, you must first get consent from all its members. You will then also need to change your company’s name and alter its Articles of Association.

There are several reasons why you might want to make the change. For example, you may want to raise investment from shareholders or want your directors to be paid out of the profits.

There are also some disadvantages to changing to a limited share company, however, such as the fact that shareholders will have limited liability and members will have unlimited liability so you should weigh up all the pros and cons before making the transition.

If you decide to convert your limited by guarantee company to a limited by shares company, it is important to seek professional advice beforehand as there are a number of legal and tax implications that need to be considered.

limited by guarantee membership

Can You Transfer Membership in a Limited By Guarantee Company?

If you want to transfer your membership in a limited by guarantee company, you will need to get the consent of the directors first. You may also need to get the consent of other members depending on what is stated in the company’s Articles of Association.

Once you have obtained the necessary consent, you can transfer your membership by completing a transfer form and sending it to the company’s registered office. The form must be signed by both the transferee and the transferor, as well as by two witnesses.

It is important to note that you will lose your membership in the company if you transfer it and will not be entitled to any of the benefits that come with being a member.

How Are Limited By Guarantee Companies Wound Up?

If a limited by guarantee company is wound up, its members will be liable for the debts of the company up to the amount first agreed upon when establishing the company.

There are two types of winding up: compulsory and voluntary. Compulsory winding up occurs when a company is unable to pay its debts and the court orders it to be wound up. Voluntary winding up occurs when the members of a company all agree to wind it up such as when the company has achieved its objectives or is no longer profitable.

Once a limited by guarantee company has been wound up, its assets will be sold and the proceeds used to pay off its debts. Any money left over will then be distributed to its members.

The process for winding up a limited by guarantee company is much the same as that for limited by shares companies. Limited by guarantee companies, however, often have numerous members and so it can make it more difficult to pass the necessary resolution. All members must agree to the winding up of the company and have an equal vote unless otherwise stated in the Articles of Association.

Examples of Limited By Guarantee Companies

The majority of UK charitable organisations are limited by guarantee, and any registered under the Charity Commission must be listed as limited by guarantee. Incorporated social enterprises that exist to benefit the community are also commonly listed as limited by guarantee companies such as public sector bodies, property management, sports and social clubs, schools and colleges and religious institutions.

Examples of limited by guarantee companies in the UK include British Red Cross, The BBC, The Scouts Association, and Cancer Research UK.

There are also many limited by guarantee companies in Ireland, such as the Gaelic Athletic Association, the Irish Red Cross, and Amnesty International.

register your company

How to Register a Limited By Guarantee Company

If you want to register a limited by guarantee company, you will need to:

  • Give the company a name
  • Appoint at least one director and one guarantor – one person may assume both roles, or there can be multiple directors and guarantors.
  • Register the office address.
  • Draft the company’s Memorandum and Articles of Association. The memorandum will state the guarantor’s information and their agreement and will outline the regulations that the company must follow.
  • Register the company with Companies House, the Registrar of Companies in the UK
  • Pay the registration fee
As you can see, there are a few steps involved in setting up a limited by guarantee company, however, it is relatively straightforward and can be a great way to protect your business or non-profit organisation.

Final Thoughts

If you are thinking of setting up a company, you may be wondering whether to go for a limited by guarantee company or a limited by shares company. Both have their advantages and disadvantages, so it is important to weigh up the pros and cons in relation to your company before making a decision. We hope this article helps you to make the right business structure decision for your company. Good luck!

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