The companies which are basically used by charitable firms like community clubs, societies, or sporting clubs are known as companies limited by guarantee. This type of formation is only used by the non-for-profit companies. Any kinds of profits earned by these industries are invested back into the companies rather than distributing that profit among members. These profits are invested back into the companies for other things like repairing, replacing, and upgrading equipment just to grow companies.
Becoming a member of the company limited by guarantee means you are protected from any kind of personal liability, if the company runs into any debt. Its procedure is same as the company limited by shares. The shareholders of a company, limited by shares are only liable for a number of shares they have in the company. They don’t need to pay anything else than this.
When applying for funding for charitable firms or local authorities, members of a company limited by guarantee are more successful. And such kind of not-for-profit organizations only accepts the application form of companies limited by guarantee while rejecting others that are not companies limited by guarantee.
Members have limited liability
When the members know that they and their other fellow members will not be held liable for any kind of debts that company incurs in the future, then they will feel more comfortable and confident. When you start a company, at that time, the debts you have to face are not much impactful because the size of the company is very small. But as the size of these charities and community groups’ increases, the size of liability for the members also increases with their growth. Most of such charities and sports clubs go through the formation right from their first day to become a company limited by guarantee. But, other clubs will move to this option when they realize that their firms grow and become very large to be left to chance.
Most of the community groups and charities rent out their local premises or equipment by financial contracts or credit agreements, and even hire new staff. But, if due to some reasons, the company fails to cover their target, then the company has to stop trading and become strapped. In this case, all the financial loss which company is suffering from will have to be covered from the members who are running it. This condition arises when a person providing the funding withdraw all his funding (which secures a company financially) and awards it to someone else.
Whereas, in case of a company limited by guarantee, the members of the company have to pay only a guaranteed amount which is already written in the articles of the company. In maximum cases, this guaranteed amount is just £1.00. This means, as per the rules, when a company limited by guarantee goes into insolvency then each and every member of that company has to pay only £1.00 for company debts, and nothing else.
But, in any case, like, when a member of the company limited by guarantee is found responsible for fraudulent trading- in this situation that particular member will incur a personal liability. And that member has to pay for all company debts made by him.
What is the difference between a guarantee member and a shareholder?
The roles of a private company limited by share and a private company limited by guarantee are quite similar. Their similarities are as:
The only major difference between the two types is that a company limited by guarantee does not have any shareholders or share capital. Instead, they only have members in their company. These members of the company are responsible for managing the company. But, if the company makes any profits then its members don’t receive any part of it. All the profits made are kept for the furthering the growth of the company. It is mandatory for each company to have one or more than one member, and all these members are eligible to attend AGM of the company or cast their votes. These members have the right to hire the new board of directors, or even remove directors if there is any need. All in all, the whole control of the company is up to its members.
For example, you can be familiar with a local society or club that runs its business as a company limited by guarantee. Also, you may notice that every year, at the Annual General Meeting (AGM), the members of these clubs give their vote to select a team to sit on the committee to operate the club on behalf of other members of the club for the next year, or for the period of term subjected to the rules described in the constitution of that club. All the members of such clubs are limited by guarantee; basically by just £1.00. Each member is free to stand for the election and can be added to the club committee or board of directors. This selected group is responsible for managing all activities in the club and they can be called by any name as that organization chooses to call them.
There can be different classes of members in a company limited by guarantee. And this is quite helpful when you are dealing with a large firm having many different members of your club. For example, a club can have different groups - some with seniors and some with junior members. The team of junior members includes members who are under 16 and they are not eligible to vote until they got 16. You can also have social members in your club who don’t have the right to vote, and their rights depend on the level of subscription they prefer to take out.
Being the members of a private company limited by guarantee, all the members work together to control the company and run it smoothly, but they don’t own that company. Also, the members of such company don’t have the right to hold any shares in the company, so they cannot buy or sell company’s shares to get the benefit. Whenever a company earns some profits, all profits are held strictly for company’s profits rather than distributing them among the members. All the rules about how profits of a company can be used are written in the articles of the company. They can be used towards repairing and purchasing equipment, building, maintenance, or paying off financial contracts. In fact, even if there are some profits left, after doing everything mentioned in the company’s articles, still these extra profits cannot be distributed towards the payments and salaries of the directors.
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