Setting up a company can be daunting. Understanding your business or enterprise niche along with the various forms of company registration is crucial for the success of your business - but can also be confusing.
If you're not a charity, social enterprise or non-profit organisation, it’s likely, you won't need to become registered as a company limited by guarantee.
However, if you are looking into setting up a company limited by guarantee, we have created this guide so you understand all of the legal considerations.
Company limited by guarantee definition
Unlike traditional limited liability companies, a company limited by guarantee has no shares or shareholders. Instead, the company’s members provide a statement of guarantee upon the formation of the company. This must be registered with Companies House.
A company limited by guarantee is generally a structure used by not-for-profit organisations (NGOs), social enterprises, or charities.
What is a statement of guarantee?
Every member of a company limited by guarantee provides a statement declaring. This sets out that t if the company is wound up whilst they are a member, or within a year of them ceasing to be a member, they will contribute to the assets of the company. This is usually a a specified and nominal amount.. This is done to ensure:
- The debts and liabilities of the company are paid
- The costs, charges, and expenses of winding up are covered
- The contributions of the members are calculated and paid out
Forming a company limited by guarantee
The formation of a company limited by guarantee is essentially the same as one limited by shares. Either:
- The company is formed from scratch, with incorporation documents such as the Articles of Association and a Shareholders’ Agreement (if applicable) and the appointment of a director/s.
- A shelf company (one that is incorporated but not trading) is purchased, and the constitution is amended to meet the members’ requirements.
To incorporate a company limited by guarantee, you will need to register a Memorandum of Association and Form IN01 with Companies House. Payment of a fee will also be required.
All companies limited by guarantee must have at least one guarantor and one director; this can be the same person.
Furthermore, you will need to provide a physical address for your company and information about people with Significant Control (PSCs) in the business. Usually, the directors and guarantors will be PSCs.
What is a person with significant control (PSC)?
A person with significant control (PSC) is someone who owns or controls your company. They are sometimes called ‘beneficial owners'.
A PSC is someone who meets one of the below five conditions:
- Owns more than 25% of shares in the company (this will not apply to a company limited by guarantee)
- Has more than 25% of voting rights in the company
- Can appoint or remove the majority of the board of directors
- Exercises or has the right to exercise significant influence or control over the company
- Has the right to exercise, or exercise, 'significant influence or control' over a 'trust' or 'firm' which is not a legal entity but would satisfy any of the four conditions mentioned above if it were an individual
Does a company limited by guarantee have to use the word ‘limited’ in its name?
It depends on the type of company; in certain circumstances, the company may leave off the word "limited" in its name. Many charitable organisations decide not to have "limited" in their name. This is because it can give the impression of a more commercial enterprise and puts off potential benefactors.
Does a company limited by guarantee have shareholders?
In a company limited by guarantee, there are no shareholders, but the company must have one or more members.
Subject to any special provisions in the company's articles, the members will be entitled to attend general meetings and vote. In most companies, they can appoint and remove the directors and have ultimate control over the company.
Does a company limited by guarantee pay tax?
The same rules and regulations apply to companies limited by guarantee as to companies with a share capital. The former must file accounts at Companies House, file annual returns, keep proper accounting records, appoint directors correctly and file returns with HMRC.
If your company is registered with the Charities Commission andHMRC is unlikely to require a CT600, and you will not have to pay corporation tax.
Can guarantors take a share of the company’s profits?
There is no legal restriction on guarantors taking a share of a company's profits limited by guarantee. However, this seldom happens because most are set up for not-for-profit purposes. Instead, any profits generated by the business are fed back into the company to fund its not-for-profit activities.
If members take a share of the profits, the company will lose its charitable status and associated tax benefits. To minimise confusion, if you plan for members to keep the profits generated by the company, it makes sense to limit the company by shares.
What are the advantages of a company limited by guarantee?
Forming a company limited by guarantee means:
- The company is a separate legal entity from its members and their liability for its debts is limited
- Each member will only be responsible for paying the company’s debts up to the limit of their guaranty
- The organisation will have professional credibility, which can help it reach its objectives more effectively
Still unsure of the benefits of a company limited by guarantee?
Our expert charity lawyers would be happy to explain so you can understand how this type of legal structure can help you achieve your not-for-profit objectives.
Get legal assistance from LawBite
Setting up a company limited by guarantee provides a robust legal and tax-beneficial structure for your charity, sports club, or NGO.
LawBite has experience helping startups, charities, and small businesses achieve their commercial ambitions and regulatory compliance. To find out how we can support you, book a free 15 minute consultation or call us on 020 3808 8314.