Creating a legal structure for a club, charity or not-for-profit organisation is important, not only because it protects assets and creates structure but also because it gives it a separate legal personality from the people who run it.
A company limited by guarantee does not have a share capital or shareholders, but instead has members who act as guarantors.
This sort of setup lends itself well to organisations such as clubs, co-operatives, social enterprises, community projects, membership organisations and charities.
After all, these groups serve social, charitable, community-based or other non-commercial objectives so they typically retain any surplus income for reinvestment or use it to promote the non-profit objectives of the business rather than distribute profits to those who run them.
What does it involve?
Unlike unincorporated organisations, a company limited by guarantee has an existence which is legally separate from its members.
This means that property and other assets can be held in the company’s name and the company can enter into contracts and employ people.
Limited liability also serves to protect the members of the company from personal liability for the company’s debts.
Like other types of private limited company, a company limited by guarantee:
- Is incorporated at and regulated by Companies House and subject to the Companies Acts. If the company is charitable, it will also be subject to charity law and be regulated by the Charity Commission or, in Scotland, the OSCR.
- Is subject to rules on its name. Although they must typically include the suffix ‘Limited’ or ‘Ltd’ in their names, there is an exemption available from this requirement if the company is set up for certain objects and does not distribute its profits to members.
- Requires both a Memorandum and Articles of Association.
- Must have a registered office address based in the country of incorporation.
- Must register its annual accounts.
- Must submit an annual return to Companies House and make various other filings when various events occur.
- Must maintain certain statutory registers.
So what makes it different?
A company limited by guarantee does not, except in very few legacy companies formed in 1981 or before, have shareholders or share capital.
Instead, it has guarantors, or members, whose personal liability is limited to the guarantee amount they agree to contribute towards the debts of the company.
This guarantee, which applies if the company is unable to pay bills or is wound up, is most often nominal: the most common guarantee amount is £1.
Charities will often refer to members as trustees, schools usually call them governors and in other cases they may be termed committee members.
In a residents’ management company, the directors might collectively be the management committee, or in other organisations be termed the board of managers.
A company limited by guarantee must:
- Have at least one member and, unless the company’s Articles of Association state otherwise, there’s no maximum limit.
- Be controlled by the guarantor members in much the same way as shareholders control a company limited by shares.
- Report the first members of a company limited by guarantee to Companies House. However, after that there is no need to report to Companies House any changes in membership or the identities of new members.
- Must appoint one or more directors to manage the day-to-day operations. All companies must have at least one director, while companies set up for charitable purposes will typically require at least two. Like in other types of company, the role of the directors includes a legal responsibility to promote the success of the company.
- Must file accounts and tax returns to the same deadlines as a company limited by shares but share capital will not appear on the balance sheet and different terminology is typically used, alongside a note that the company is limited by guarantee. ‘Profit’ should instead be termed ‘Surplus’ and ‘Shareholders Funds’ should be replaced by ‘Reserves’.
What’s the financial position of a company limited by guarantee?
As a company limited by guarantee doesn’t have share capital, it cannot raise money by issuing shares to equity subscribers.
While this generally makes them more suitable to non-profit ventures, they can pursue their object by securing funds via grants or borrowing – for example by issuing debentures.
Many membership organisations set up as companies limited by guarantee impose annual subscriptions or a joining fee in order to cover essential running costs.
The Companies Act does not specifically prevent a company limited by guarantee from distributing surplus income to members and there are a limited number of companies which do so.
However, in the vast majority of cases any profit is retained by the company to advance the aims of the organisation.
Henry Catchpole is founder of Inform Direct.