Private Company Limited by Guarantee

/Private Company Limited by Guarantee
Private Company Limited by Guarantee2018-07-30T17:01:03+00:00

Companies limited by guarantee don’t have shareholders, but members which are bound by a guarantee in the company’s articles of association, by which they are required to pay the company’s debts up to a fixed sum which is usually £1.

This form of business is mostly used by non-for-profit companies such as charities, community projects, clubs and societies and it is chosen by groups of people who need a corporate entity to raise money and promote the purpose of the organisation. They usually need specialised work in drafting their articles for their particular organisation and their profits are not distributed among members but retained within the organisation or used for other purposes.

Charities, community projects and other such organisations are created as companies limited by guarantee mostly to protect the people running the company from personal liability for the company’s unpaid debts, which can be a real risk for the management committee or other similar body.

In some cases, an organisation can have leasehold premises, equipment on finance contracts, employed people and other liabilities that can’t be so easily turned off. In such cases if the organisation becomes insolvent, due to unforeseen circumstances such as a sudden withdraw of financial support, the people running it can be made personally liable.

On the other hand, in case of a company, the company itself as a separate legal entity is liable for its debts and not the people running it. The difference between a company limited by shares and one limited by guarantee is that in the first case the shareholders‘ liability is limited to the amount the shareholder has agreed to pay for the shares, while in a private company limited by guarantee, it is limited to the amount of the guarantee set out in the company’s articles, which is typically just £1. In both cases the directors will be considered personally liable for the debts only if they are guilty of fraudulent trading or other such wrongdoing.

What is different about a private company limited by guarantee?

There are a lot of elements which make a company limited by guarantee very similar to a private company limited by shares: registration to the Companies House, accounts and annual return reports, being run by directors, etc. The major difference consists in not having shareholders, but members who run it.

Although in a company limited by guarantee you don’t have shareholders, there must be one or more members which are entitled to:

  • Attend general meetings
  • Vote
  • Appoint and remove the directors
  • Have ultimate control over the company.

It is the case of many clubs which have members that elect a committee to manage it on their behalf. If the club is defined as a company, the same law provisions relating to general meetings and resolutions that define the activity of a share company also apply to companies limited by guarantee.

Similarly to a company limited by shares, a company limited by guarantee can have different classes of members such as non-voting members or members who have restricted rights in some other way.

While most companies limited by guarantee have several directors, the rule says they must have at least one, even if the directors may have other titles such as committee, management committee, board of managers, trustees or governors. They typically have wide-powers which depend on the terms of that particular company’s articles and are conferred on the directors collectively (when they are sitting as a board), when they are set up as sub-committees, or given particular to directors as special responsibilities (treasurer, membership secretary, etc.). In some cases directors may be appointed by outside bodies (charities, local authorities, particular interest groups).
Not having the possibility to issue shares, companies limited by guarantee are limited in their fund-raising capacity and this is one of the reasons that some projects are set up as companies limited by shares even if they are not profit motivated. Still, a company limited by guarantee can borrow money and it also may issue debenture stock.

Another characteristic determined by the lack of shares is that even if the control of the company means pretty much the same think in both cases, members of the guarantee company can’t transfer this control by selling their shares as shareholders can.

Although Companies Act does not prohibit a company limited by guarantee to distribute profits, there are usually restrictions regarding the payment of salaries, fees and profit distribution to directors put on the company’s articles, the later applying both to current profits and to the distribution of assets in case the company is wound up.
Non-profit companies limited by guarantee with activities such as commerce, art, science, education, religion, charity or any profession can be exempted from using the word ‘Limited’ (or ‘Ltd’) at the end of its name.