It can be pretty overwhelming when you’re starting a new company. Your frantic online research will probably return a number of results such as limited company formation or an extensive factsheet on what constitutes a limited liability partnership. To help you set up and become familiar with specific registration jargon, we’ve provided this detailed guide on what defines a company limited by guarantee.
What Defines a Company Limited by Guarantee?
A company limited by guarantee is mainly used by charities, social enterprises or non-profit organisations. A non-profit organisation is usually a voluntary organisation, community group, or a form of enterprise that produces income for community based, charitable or social objectives. Companies limited by guarantee must be enrolled with Companies House.
A Company Limited by Guarantee and Shares
Most notably, a company limited by guarantee, unlike the conventional limited by shares organisation, does not have any shares or shareholders. However, a company limited by guarantee is the ownership of guarantors who pay an agreed amount of money towards the company’s debts.
To this end, the owner(s) of a company limited by guarantee are lawfully bound by financial guarantees instead of shares. This is due to the fact that excess business earnings are not usually shared to guarantors. Alternatively, company earnings are retained by the company to realise the charitable or non-profit aims of the organisation. Which leads us on to profits…
A Company Limited by Guarantee Has No Profits
Generally, a company limited by guarantee does not distribute profits to its guarantors. Instead, as stated above, the profits are re-invested to aid the promotion of the not-for-profit entity’s practices. Importantly, if there is a distribution of profits, then the organisation will have to forfeit its application for a “charitable status”.
A company limited by guarantee has the responsibility of its debts, excess income and assets. The members of a company limited by guarantee who are referred to as guarantors are protected by limited liability. Again, should there be an unfortunate bankruptcy, their financial responsibility to the company is restricted to what they have agreed to pay. The members of a company limited by guarantee do not have any legal accountability for the debts of an enterprise beyond the fixed sums in their guarantees.
Who Controls a Company Limited by Guarantee?
A company limited by guarantee must appoint at least one director to run its regular business operations and financial investments. It’s not unusual for guarantors to be directors — consequently, a company might only have one, or several, guarantors and directors.
Who Owns a Company Limited by Guarantee?
A company limited by guarantee is owned by its members (guarantors) and no shareholders are required. A company limited by guarantee may be owned by (at least) a guarantor, which implies you can register the company on your own or with other members.
To become a guarantor, a specific amount of money to the company must be agreed. This financial agreement is considered to be a payable “guarantee” should the company fail to settle its bills. Each guarantor signs a guarantee statement during the process of company formation, or consent to the statement should the company be registered online. Additionally, a guarantor can be one person or a corporate body.
Note: A guarantee can often be as much as £1 per member.
A Company Limited by Guarantee Vs Limited Liability Partnership (LLP)
There is one main difference between these two types of company formations:
A company limited by guarantee is suitable for anyone who wishes to set up and operate a social enterprise or a non-profit organisation (either individually or jointly) while safeguarding their individual liability and boosting the professional integrity of their business enterprise.
A limited liability partnershipon the other hand is not an appropriate model for not-for-profit charities or organisations. This type of incorporated structure is more suitable for groups of at least two persons who desire to set up and operate a commercial partnership in order to reduce their individual financial liability. Typically, accountants, lawyers and solicitors set up limited liability partnerships (since such firms often run in partnerships).
How Do I Register a Company Limited by Guarantee?
A company limited by guarantee can be processed by either a postal application or by completing an online form for Companies House. The most efficient approach to setting up a company is with the help of a company formation agent — the entire procedure is concluded electronically in a few minutes, and applications are typically approved in less than three hours.
What Is Needed to List a Company Online?
Take note of the following points when you want to list a company online:
- Decide on a unique company namethat will subsequently include the suffix “Ltd” or “Limited” unless otherwise specified. It is a must for private limited companies in the UK to include “Ltd” or “Limited” at the end of their company names. Companies enrolled in Wales may have the Welsh equivalents: “Cyfyngedig” and “Cyf”.
- Present a registered office addressthat consequently appears on the public record. You must choose an address that is in the same region of the UK as your company incorporation (Scotland, England and Wales and Northern Ireland).
- Choose at least one director and have at least one guarantor who agrees to the guarantee statement and adopt the standard Articles of Association (or upload updated Articles that conform with company law).
- Make available a service address for every director. Your company limited by guarantee will be ready to start trading soon after Companies House endorses your application and present to you the certificate of incorporation.
Note: Should your company be limited guarantee, it is possible to apply for exemption for the “Ltd” or “Limited” suffixes with the Articles of Association stating that the company:
- Possesses objects of regulation or promotion of commerce, science, art, religion, education, charity or any career
- Is expected to spend its earnings on promoting its objects
- Is unable to share income among its guarantors
- Expects every member to contribute to the company assets should it be wound up in the course of their membership, or within a year of their membership’s termination
What Are the Benefits of a Company Limited by Guarantee?
- A company limited by guarantee is a separate legal entity from its owners, and therefore is responsible for its own debts.
- The company’s guarantors have protection over their personal finances. They are only responsible for paying company debts up to the amount of their guarantees.
- A “Limited” status is good for company branding and it makes the company appear credible which results in a build-up of trust among clients or investors.
If you’re not a charity, social enterprise or non-profit organisation, then it’s likely that you won’t be registered as a company limited by guarantee. Understand your business or enterprise niche first along with the various forms of company registrations, and then finalise the correct company incorporation for you.
If you want to find out more about a company limited by guarantee, or how you can incorporate your enterprise, contact our knowledgeable company formations team now for expert advice and guidance.