A company limited by guarantee is a unique type of business structure that provides protection to the individuals involved in the company from financial liability. Unlike traditional companies, it has guarantors instead of shareholders.
This type of company is not primarily established to generate profits. Any profits that are generated are not distributed like a company limited by shares. Instead, they may be retained for future use by the company or used to market and promote the organisation’s work or purpose.
In summary, a company limited by guarantee offers a legal structure that provides protection to the individuals involved in the company and is usually not established for profit-making purposes.
What Organisations Are Limited Guarantee Companies?
The limited by guarantee corporate structure is often chosen by the following types of organisations:
- Charitable organisations
- Sports clubs
- Trade associations and similar groups
- Educational institutions such as schools and colleges
- Community organisations.
What is the Makeup of a Company Limited by Guarantee?
In a company limited by guarantee, the participants are known as “guarantors” and can be individuals or corporations. Their names and information must be listed on the register at Companies House. The company is run by appointed directors, much like a company limited by shares, but the overall purpose is different.
To establish a company limited by guarantee, the following requirements must be met:
- Registration with Companies House
- Provision of a registered office address
- Identification of the company’s activities through Standard Industrial Classification (SIC) codes
- Appointment of at least one guarantor and one director, who can also fulfill both roles
- Identification of People with Significant Control (PSCs), typically the directors and guarantors
- Development of a Memorandum and Articles of Association:
– The Memorandum outlines the members of the company and their agreement to become members
– The Articles of Association establish the rules and regulations by which the company will operate, including the powers of the directors and a dispute resolution procedure.
The financial liability of the members is limited by the predetermined guarantee value, which is often set at £1. A statement of guarantee from each member must be filed with Companies House upon formation.
What are the Advantages of Establishing a Limited Guarantee Company?
The company operates as an independent legal entity and its members enjoy the protection of limited liability up to the amount of the established guarantee. This means that they do not have to fear personal financial responsibility for any future debts of the company.
The limited guarantee structure enhances credibility and instils trust in stakeholders. If the organisation requires outside assistance, its status conveys a professional and stable organisation with a clear mission.
The company operates without a hierarchical structure based on ownership of shares, which is common in companies limited by shares. Every member has equal standing and equal rights, with no differentiation based on share ownership.
Are There Any Drawbacks to Forming a Company Limited by Guarantee?
Potential drawbacks to consider include:
- Mandatory annual filing of accounts and returns with Companies House and HMRC, as well as notification of any changes to the registered address of directors/guarantors
- The yearly expenses associated with running a company limited by guarantee are higher compared to a volunteer organisation
- The obligation to maintain proper accounting records and submit statutory accounts and returns may become burdensome
While the separate legal status of a company limited by guarantee offers protection to members and is responsible for its own debts in most cases, there are instances where directors or guarantors may become financially responsible for the company’s debts, such as in cases of misappropriation of funds.
For more information on companies limited by guarantee and their potential drawbacks, you may reach out to InsolvencySupport.co.uk. Our team of experts offers a free, same-day consultation and operates from various locations across the UK.