Who would choose this option?

Companies limited by guarantee are a good choice for charity organisations, or any community based group such as clubs and societies, or community projects with specific goals in mind. Basically any company that wants to run on a not-for-profit basis. This means that any profits generated by the operation will not be distributed to their members, but instead will use the profits for another purpose.

The reason why charities and community organisations choose to form a company limited by guarantee is to protect the members who are running the company from any personal liability towards the companies debts. It is also a requirement by some local authorities and funding bodies that the charity or organisation be registered in this way before they can be considered for funding.

Limited liability

By not registering as a limited company , the people running the charity group or community organisation will be left open to the risk of being made personally liable towards paying off any unpaid debts run up in its name.

This can be more risky than you think, especially when you consider that most charities, sports clubs and community groups can grow to be quite large enterprises, and have liabilities against their name such as leasehold premises, hire equipment, credit and financial contracts to pay for goods or services. If there is a sudden downturn in income that means outgoings are not met, maybe through a loss or withdrawal of regular financial funding or support from a local council for example, they may be forced to become insolvent. This will result in the people running the operation becoming personally liable for making up the shortfall in finances, although this may not apply to all members that are not on the committee or management board, such as volunteers.

On the other hand, registering a company limited by guarantee will mean that the organisation is recognised as a separate legal entity, and will be liable for any debts run up, rather than the people who run it. Setting up a company limited by shares will mean the shareholders' liability towards the outstanding debt would be limited to the agreed amount set out in the company's articles, in most cases this can be as low as £1.00. Regardless whether a company is limited by shares or by guarantee, the directors will only be made liable for the outstanding debts of the organisation if they are found guilty of any wrongdoing, such as fraudulent or wrongful trading for example.

What is the difference between being limited by guarantee and limited by shares?

Much the same as a company limited by shares, a company limited by guarantee needs to be registered with HMRC and Companies House. The company will have registered directors, and will be expected to register its accounts and annual returns each year. The only major difference between the two different companies is that when you are registered by guarantee, you do not have shareholders or a share capital.

In a company limited by guarantee, the company must have one or more members. The members act in much the same way as shareholders would, so will be entitled to attend general meetings, cast votes, and remove and appoint directors to the board, subject to any special provisions spelled out within the company's articles. In short, the control of the company remains in the hands of the members.

This is a very common format for sports clubs, societies and community groups to follow. Each year at the AGM a committee will be elected by its members to effectively run the club or society on their behalf for the next year, subject to the rules of their constitution. Where a club or a group is a company, the same will usually apply and the company's articles will reflect that.

It is possible to have different options applied to members in a guaranteed company. For example there may be different tiers or levels of membership where some people will have limited powers, such as not being allowed to vote, junior members being an obvious one with people below a certain age, or members who pay reduced subscription fees to receive club information and newsletters, but have no direct say in how the club is run.

Company Directorship

To be able to be a company limited by guarantee, the group or organisation must have at least one director, and many companies choose to have several in place. You can give your directors some form of title if you so choose, such as the board of directors, management board, governors or trustees. It is entirely up to you, and you may want the name to reflect the fact that they are in day to day control of the company.

Your company directors will have their powers set out within the terms of the company's articles, and these powers will usually be wide ranging, and conferred on to the directors as a collective. As the board of directors, they may agree to delegate specific roles amongst themselves, such as secretary, treasurer, membership officer etc. They may even set up sub-committees to oversee certain aspects of the company as needed.

You may wish to appoint directors from outside bodies, such as specialist charities or organisations that are either backing your project, or can bring in specialist skills that may be lacking within your company.

No share capital

As a company limited by guarantee has no shareholders, it cannot be owned in the same way as a company with a share capital can be owned by its shareholders. The members that control the guarantee company do not own shares that can be sold on to others, or can be profited from. It is quite commonplace for restrictions to be put on profits, and these are usually written into the company articles. Usually what this means is that not-for-profit companies will donate their profits to the charity they are supporting, or the funds will be re-invested into the community group or sports club to help continue their work, or to buy new essential equipment.

Most not-for-profit companies such as social enterprises, charities, community groups, clubs and societies are limited by guarantee. They can also be exempted from having to carry the word 'Limited', or 'Ltd', at the end of their name if set up for the specific purpose of promoting commerce, art, science, education, religion, or a charity.