Who would choose this option?
Companies limited by guarantee are the firms that are mainly charity organisations, community-based projects, societies, clubs, and other similar groups with precise goals in mind. Basically, most guarantee companies run on a not-for-profit basis. It means, all such companies don’t distribute generated profits to their members, but instead, retain them within the company or use them for some other purpose.
The main reason for charities, community projects, etc. to form a company limited by guarantee is to protect the people who are running the company from personal liability for the company’s debts, just as a business may be set up as a company limited by shares for the same reason. Sometimes funding bodies like local authorities, insist on an organization being registered as a company limited by guarantee.
If a charity, club, or community project is not registered as a limited by guarantee Company, then the people running this charity group can be held personally liable for its unpaid debts.
This can be a real problem and can be riskier than you imagine. Some charities, sports clubs, and community groups can be substantial enterprises with liabilities that cannot easily be turned off. They may have employ people, leasehold premises, equipment on finance contracts, and others.
If the income is not meeting the desired outgoings, the organization may be forced to become insolvent and the members running it can be held personally liable for the shortfall in finances. This can happen because of unfortunate and unexpected circumstances like a sudden loss or withdrawal of financial support from a body such as the local authority.
This liability for the shortfall may not apply to all people. It is applicable only on the committee or management board, not on the volunteers.
On the other side, if a charity or club is registered as limited by guarantee, then it means the company is a separate legal entity itself, and is liable for all debts run up; not the member who own or operate it. In a company limited by shares, the liability of shareholders towards debt is limited to the amount they have agreed to pay for their shares. In most cases, it is just £1.00. Whether a company is limited by shares or limited by guarantee, the members operating the company will only incur any personal liability for the company's debts if they have been guilty of some wrongdoing, such as wrongful or fraudulent trading.
What is the difference between being limited by guarantee and limited by shares?
Like a company limited by shares, a company limited by guarantee requires being registered with Companies House and HMRC. The company must have registered directors and must register its account and annual returns each year. The only main difference between both limited by guarantee and limited by shares is that when you are registered by guarantee, you do not need to have a share capital or shareholders, but people who run it.
A company limited by guarantee does not need to have shareholders, but it must have one or more people to run it. The members behave like shareholders and do the same job. They will be entitled to attend general meetings and vote. They can also appoint or remove the directors to the board. In general, these members have ultimate control over the company.
This has become a common format for sports clubs, community groups, and societies, and all these clubs operate on this basis. Each year, these members meet at AGM (Annual General Meeting) and elect a committee on their behalf to run the club, and subject to the rules in the club’s constitution. If a group or club is a company, the same rules will be applied and set out in the articles of the company.
In a company limited by shares, there are different classes of members. So, like a company limited by shares, it is possible for a company limited by guarantee to have different classes of members. For example, there may be different levels of membership where some members will have limited rights. There may be some non-voting members. In a sports club, there may be junior members who cannot vote, or social members, who pay reduced subscription fees but cannot use the sports facilities.
A company limited by guarantee must have at least one director as a private company. Most limited by guarantee companies have more than one in place. The directors of the companies may be given some form or title such as the management board, board of directors, trustees, committee, and governors. Whatever title or form they may be given, it completely depends on you, and you may want the name to reflect the fact they are in day to day control of the company.
The powers of a company’s directors will depend on the terms of that particular company’s articles, but usually, they are given very wide powers of management, and all these powers are conferred on the directors collectively. As the board of directors, they may agree to hand over some powers and responsibilities to themselves such as treasurer, secretary, membership officer, etc. Of course, they may also set up sub-committees, etc., to fulfill certain aspects of the company as required.
In some companies, some or even all directors may be selected by one or more outside bodies like, local authorities or specialist charities who are backing the project. Also, some directors may be elected by particular interest groups.
No share capital
As per the fact that a company limited by guarantee has no shareholders, so this company cannot be operated in the same way as a company limited by shares operated by its shareholders. The members of a guarantee company operate it in the same way as shareholders run a share company, but they don’t have any security or shares in the company which they can sell to others to get profit. Basically, it means that non-for-profit companies are supporting their profits to the charity clubs they are supporting, or the funds will be re-invested into the sports clubs or community group to promote their work or purchase new necessary equipment.
All non-for-profit organizations including charities, social enterprises, clubs, societies, and community groups are limited by guarantee. If the companies are set up for the specific purpose of promoting art, commerce, religion, charity, or education, they need to have the word ‘Ltd’ or ‘Limited’ at the end of their names.
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