Companies limited by guarantee are mainly used by charitable organisations, sporting and community clubs and societies. Mostly the groups using this type of formation are not-for-profit companies that don't distribute their profits back to their members. Any profits made in due course of their business will be kept by the company to use for other things such as repairs and maintenance, replacing or upgrading equipment etc.
Becoming a member of a company that is limited by guarantee will mean you have protection against any personal liability should the company run up any debts. It works in a similar way to how a company limited by shares, so their shareholders will only be liable to the amount of their share price, and nothing more.
Members of a company limited by guarantee are much more likely to be successful when applying for funding from local authorities or charitable organisations, and many funding bodies will insist that they only take applications from companies limited by guarantee, or more often rejecting those who are not.
Members have limited liability
It gives members limited by guarantee a lot more confidence and reassurance knowing that they and their fellow members cannot be made personally liable for paying off any debts that the company may incur. An organisation may start off quite small, so the risks at the time may be less impactful if things were to go wrong, but many community groups and charities can grow to be substantial in size, and so with it will be the size of liability for the members. Many groups and charities will go through formation right from day one to become a company limited by guarantee, but others will switch to this option once they see their organisation grow and become too large to be left to chance.
Many charities and community groups will rent out local premises, source necessary equipment through credit agreements or financial contracts, and even employ staff. If for whatever reason the funds generated by that company fail to cover their outgoings, then the company may have to cease trading and become insolvent. This will result in the people running the company having to cover the financial shortfall with their own personal money. This can often happen when a funding body decides to withdraw funding, or awards a financial grant, that you usually secure, to someone else.
On the other hand, with a company limited by guarantee, all the members that are signed up to the company will only lose the guarantee amount that is set out in the company's articles. In most cases this is usually just £1.00. What this means is that if a company that was limited by guarantee did have to go into liquidation, each member would only have to contribute £1.00 towards the company debts, and nothing more.
The only situation that will mean a member will incur a personal liability is when that member has been found guilty of something such as fraudulent trading for example. In this case that member will be personally liable towards paying off the company debts.
What is the difference between a guarantee member and a shareholder?
A private company limited by shares is much the same as a company limited by guarantee. Both types of company will be registered at Companies House, and will have to register their accounts and submit annual returns, and both will also have directors running the company.
The main difference is a company limited by guarantee does no have any shareholders or have a share capital. Instead of shareholders, you have members who control the company, but they don't receive a share of the profits that the company makes. Each company has to have one or more members, and they will be able to attend the company AGM and cast votes. Members can also appoint new directors to the board, and have the power to remove directors if there is a need. Ultimately, it is the members that have the control over the whole company.
You may be familiar with a local club or society who operate as a company limited by guarantee. Each year at the AGM their members will vote to elect the people that sit on the committee to run the club on behalf of the members for the next year, or for the duration of term subject to the rules set out in the club's constitution. All club members will be limited by guarantee, usually by just £1.00, and members can stand for election and be voted on to the club committee, or board of directors – whatever the organisation chooses to call the collective group that manages the club.
A company limited by guarantee may have different classes of members. This is often useful when you are dealing with a large company with many members. For example, you may have junior members within a sports club that are not eligible to vote until they turn 16 years old. You may choose to have social members who are non-voting members, and their rights are restricted according to what level of subscription they choose to take out.
As members of a company limited by guarantee, the members collectively control the company, but they do not own it. A member does not own any shares in the company, so cannot buy or sell shares for profit. When the company makes a profit, it is not prohibited from distributing the profits, but the company will usually have tight restrictions about how profits are used. These restrictions will be set out in the company's articles, and usually any profits made will go towards paying of financial contracts, hire-purchase equipment, building maintenance etc. Even when a company is wound up, after paying off creditors, any surplus profits may still be prohibited from going towards the salaries or payments to the directors.