Company Limited By Guarantee
What Is A Company Limited By Guarantee?
This is a popular company format and is used primarily, but not exclusively, by non-profit organisations (including charities) that require legal personality.
The company limited by guarantee model is most often used by clubs, co-operatives, social enterprises, community projects, membership organisations and charities.
This type of company:
- is legally separate from the people who run it;
- has separate finances from your personal ones;
- has guarantors and a ‘guaranteed amount and
- invests profits it makes back into the company and do not pay dividends.
Guarantors & The Guaranteed Amount
A company limited by guarantee can have many members, in fact many have hundreds, but at least one of these members must also act as a guarantor. Members can be natural people or a body corporate.
Members who are guarantors (known as guarantor members) commit to contributing a guaranteed amount towards the companies liabilities in the event of it being insolvent or being wound up. Their personal liability is limited to this guarantee amount which is usually nominal, the most common figure being £1. Except in cases of fraud or negligence, the liability of individual members is strictly limited.
The guarantor members of a company limited by guarantee exercise overall control upon the company. This is in much the same way as shareholders control a company limited by shares. They do not ‘own’ the company in quite the same sense and generally have no rights to profits from it. But they do control any changes to its constitution and will influence the most important decisions made in its name.
Directors Of Company Limited By Guarantee
The members must appoint one or more directors to manage day-to-day operations. All companies must have at least one director. There’s nothing to stop members (regardless of whether they are guarantor members or non-guarantor members) also being directors.
As in other types of company, the role of the directors includes a legal responsibility to promote the success of the company. Their exact powers will depend on the contents of the company’s articles of association, but will typically be broadly defined. Powers are usually conferred on the board of directors collectively, who may then choose to delegate them. They may, for example, set up sub-committees on certain subjects or allocate specific responsibilities to individual directors. An example of this might be a treasurer or membership secretary.
Directors v Guarantors - Difference In Roles
Guarantor members have ultimate control of companies limited by guarantee. Directors are appointed by guarantors to manage day-to-day activities and finances on their behalf.
A guarantor of a limited company is responsible for:
- forming the company (if they become a member during the incorporation process);
- deciding the aims and objectives of the business;
- appointing and removing company directors;
- determining directors’ powers (i.e., what they are authorised to do);
- paying the value of their guarantee if the company is unable to pay its debts and liabilities and
- making decisions on significant matters that are beyond the scope of directors’ powers.
A director of a limited company (regardless of what type of company it is - limited by shares or limited by guarantee) has the following responsibilities codified in law under The Companies Act 2006 .The act sets out the general duties of directors, which are:
- to act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were conferred;
- to promote the success of the company for the benefit of its members;
- to exercise independent judgement;
- to exercise reasonable care, skill and diligence;
- to avoid conflicts of interest;
- not to accept benefits from third parties and
- to declare an interest in a proposed transaction or arrangement.
A more comprehensive description of the role is provided in the directors roles and responsibilities page.
All private companies limited by guarantee require a minimum of one guarantor and one director at all times. Whilst these roles are legally distinct, it is commonplace for one person (or multiple people) to hold both position at the same time.
Setting Up A Company Limited By Guarantee
1. Choose a company name – Check availability on Companies House.
2. Appoint directors and members – You will need at least one of each.
3. Prepare articles of association – This sets out how the company will be run.
4. Register with Companies House – Apply online at Companies House.
5. Open a business bank account – Essential for managing finances.
6. Understand tax obligations – Will be subject to corporation tax. The only type of company which can be a charity is one limited by guarantee. In this case it would be exempt from corporation tax but a non charity one would not.
Limited By Guarantee v Limited By Shares
The key features of both company types is summarised in the table to the right.
Generally if your aim, when setting up a company, is to make a profit and to take that out of the business, then you would be best going down the limited by shares route. If your aim is not this but to benefit society, then the limited by guarantee option is better and also affords better potential for winning funding in the form of grants.