A private company limited by guarantee is a form of business structure often used by non-profit organisations, clubs, co-operatives, social enterprises, community projects, membership organisations and charities. Set up to serve social, charitable, community-based or other non-commercial objectives, guarantee companies typically retain any surplus income for reinvestment or use it to promote the non-profit objectives of the business rather than distribute profits to members.
Unlike unincorporated organisations, a company limited by guarantee has an existence which is legally separate from its members. This means that property and other assets can be held in the company’s name, the company can enter into contracts and employ people. Limited liability also serves to protect the members of the company from personal liability for the company’s debts.
A private company limited by guarantee is in many ways just like an ordinary private company limited by shares.
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Like other types of private limited company, a company limited by guarantee:
- Is incorporated at and regulated by Companies House and subject to the Companies Acts. If the company is charitable, it will also be subject to charity law and be regulated by the Charity Commission or, in Scotland, the OSCR.
- Is subject to rules on its name. Although they must typically include the suffix ‘Limited’ or ‘Ltd’ in their names, there is an exemption available from this requirement if the company is set up for certain objects and does not distribute its profits to members.
- Requires both a Memorandum and Articles of Association. The Articles of a company limited by guarantee will often contain a list of predetermined objects, defining what the company will do. They’ll also often contain a specific clause restricting the payment of any profits to members, instead directing the reinvestment of surplus income to further the company’s objects.
- Must have a registered office address based in the country of incorporation
- Must register its annual accounts
- Must submit a confirmation statement (or, before 30 June 2016, an annual return) to Companies House and make various other filings when various events occur
- Must maintain certain statutory registers
What’s different about a company limited by guarantee?
A company limited by guarantee does not – except in very few legacy companies formed in 1981 or before – have shareholders or share capital. Instead, it has guarantors – popularly called ‘members’ – whose personal liability is limited to the guarantee amount they agree to contribute towards the debts of the company. This guarantee, which applies if the company is unable to pay bills or is wound up, is most often nominal: the most common guarantee amount is £1. Except in cases of fraud or negligence, the liability of individual members is therefore strictly limited.
The company must have at least one member
A guarantor member of a company limited by guarantee can be any person or a corporate body. The company must have at least one member and, unless the company’s articles of association state otherwise, there’s no maximum limit. Many membership organisations set up as companies limited by guarantee have 1,000s of members, many more than the average company limited by shares. Unless membership is completely closed, the company will need a process for accepting new members.
The guarantor members of a company limited by guarantee exercise overall control upon the company, in much the same way as shareholders control a company limited by shares. Although they do not “own” the company in quite the same sense and generally have no rights to profits from it, they control any changes to the constitution of the company and will influence the most important decisions made in its name.
The first members of a company limited by guarantee must be reported to Companies House. However, after that there is no need to report to Companies House any changes in membership or the identities of new members. That said, it is still a requirement for the company to maintain an up to date register of members, which should be available for inspection.
In other articles, we look at the process of admitting new members and the requirement for membership certificates of a company limited by guarantee.
Who runs a company limited by guarantee?
The members must appoint one or more directors to manage the day-to-day operations of a company limited by guarantee. All companies must have at least one director, while companies set up for charitable purposes will typically require at least two. There’s nothing to stop the members also being directors: in fact, the directors of a company limited by guarantee will often also be members of the company.
Whatever title they are given, if they exercise day to day control over the company they remain directors of it.
Often, the directors of companies limited by guarantee geared towards certain purposes will be given some other title. Charities will often refer to them as trustees, schools usually call them governors and in other cases they may be termed committee members. In a residents’ management company, the directors might collectively be the management committee, or in other organisations be termed the board of managers. Whatever title they are given, if they exercise day to day control over the company they remain directors of it. It’s important to ensure that each individual who assumes the role of director is properly appointed and fully aware of their duties.
Like in other types of company, the role of the directors includes a legal responsibility to promote the success of the company. Their exact powers will depend on the contents of the company’s articles of association, but will typically be broadly defined. Powers are usually conferred on the board of directors collectively, who may then choose to delegate them. They may, for example, set up sub-committees on certain subjects or allocate specific responsibilities to individual directors – to a treasurer or membership secretary, for example.
Members typically appoint the directors of a company limited by guarantee and, likewise, have the right to remove a director by ordinary resolution. In some companies, however, some or perhaps all of the directors may be appointed by external organisations with an interest in the company or its objects: this might include external backers like local authorities, unions or charities, for example.
The initial directors of a company limited by guarantee must be reported to Companies House when the company is formed. Thereafter, each new appointment, a change in details or termination of an existing appointment must similarly be reported. A company limited by guarantee may also choose to appoint a company secretary, although generally there’s no legal requirement to do so.
What’s the financial position of a company limited by guarantee?
As a company limited by guarantee doesn’t have share capital, it cannot raise money by issuing shares to equity subscribers. While this generally makes them more suitable to non-profit ventures, they can pursue their object by securing funds via grants or borrowing – for example by issuing debentures. Many membership organisations set up as companies limited by guarantee impose annual subscriptions or a joining fee in order to cover essential running costs.
the company’s articles of association will often preclude the distribution of profits
The Companies Act does not specifically prevent a company limited by guarantee from distributing surplus income to members and there are a limited number of companies which do so. However, in the vast majority of cases any profit is retained by the company to advance the aims of the organisation. In fact, the company’s articles of association will often preclude the distribution of profits and, furthermore, if members receive a share of profits from a company set up for charitable purposes the company will sacrifice its right to charitable status.
A company limited by guarantee must file accounts and tax returns to the same deadlines as a company limited by shares. The main differences to the accounts are that:
- Share capital will not appear on the balance sheet.
- Different terminology is typically used, alongside a note that the company is limited by guarantee. ‘Profit’ should instead be termed ‘Surplus’ and ‘Shareholders Funds’ should be replaced by ‘Reserves’.
There will be other requirements for certain types of companies limited by guarantee. In particular, any charitable company will also need to comply with the requirements of the Charity Commission or OSCR.
Inform Direct helps you keep up to date records for members and directors, maintain statutory books and make filings to Companies House.