What is a Company Limited by Guarantee?
A company limited by guarantee is a type of legal structure commonly used by non-profit organisations, social enterprises, and community interest companies (CICs). Unlike companies limited by shares, these entities do not have shareholders. Instead, they have members who act as guarantors.
Key Features
Members as Guarantors:
Members of a company limited by guarantee agree to contribute a nominal amount (usually £1) towards the company’s assets in the event of its winding up. This means that the liability of each member is limited to the amount they have guaranteed.
No Shareholders:
Unlike companies limited by shares, companies limited by guarantee do not issue shares. This structure is ideal for organisations that do not seek to distribute profits to shareholders but rather reinvest any surplus back into the organisation. As there are no shareholders, no dividends can be paid.
Purpose-Driven:
Companies limited by guarantee are often established for non-profit purposes, such as charitable, educational, or community-focused activities. They exist to benefit the community and are driven by a mission rather than profit.
Governance:
The governance of a company limited by guarantee is typically outlined in its Articles of Association. Directors are responsible for running the company and making decisions, while members (guarantors) have voting rights at Annual General Meetings (AGMs) and are responsible for their £1 guarantee.
Registration and Compliance:
Companies limited by guarantee must be registered at Companies House and comply with the Companies Act 2006. They must maintain a Register of Members, which includes all full members who are guarantors of the company.
Entitlement to Final Funds:
In the event of the company being wound up, any remaining funds after settling all debts and liabilities are distributed among the members. The distribution is typically based on the nominal amount each member has guaranteed, ensuring that the final funds are shared equitably.
Taxation:
A company limited by guarantee is subject to corporation tax, VAT, and payroll taxes in the same way as a company limited by shares. This means that they must comply with all relevant tax regulations and ensure timely submission of tax returns and payments. As dividends cannot be paid from a company limited by guarantee, withdrawals by the operators of the company has to be a salary. This can add to the overall tax burden, compared to a company limited by shares.
Benefits
Limited Liability:
Members’ liability is limited to the nominal amount they have guaranteed, providing financial protection in the event of insolvency.
Flexibility:
This structure offers flexibility in terms of governance and operations, allowing organizations to focus on their mission without the pressure of generating profits for shareholders.
Community Focus:
Companies limited by guarantee are often community-focused and aim to tackle social or environmental issues. They reinvest the majority of their profits in pursuit of their mission, supporting other businesses and the community.
Preferred by Grant Providers:
Grant providers often prefer to give funds to companies limited by guarantee because no dividends can be paid. This ensures that the funds are used solely for the organization’s mission and not distributed to shareholders.
Examples
Social Enterprises:
Social enterprises often use the company limited by guarantee structure to address social or environmental challenges while operating as sustainable businesses. They focus on creating products or offering services that cater to the needs of the community.
Community Interest Companies (CICs):
CICs are a special type of company limited by guarantee that exists to benefit the community. They must comply with the Community Interest Company Regulations 2005 and include specific provisions in their Articles of Association.
