What is a Guarantee Company?
A company limited by guarantee is a business structure commonly used in the UK and Ireland for non-profit and not-for-profit organisations, such as clubs, charities, and community projects. It is a type of private limited company (Ltd), although they also used to be known as Private Company Limited by Shares (Pty Lld), along with companies limited by shares. In the case of companies limited by guarantee, there are no shareholders or share capital. Directors manage the company, but its members own it. In this regard, a company limited by guarantee is similar to a limited liability partnership (LLP) .
The distinguishing feature of a company limited by guarantee, when compared to its share-limited counterparts, is that its members give an undertaking in its Memorandum of Association – normally in the form of a monetary value. If the company goes insolvent, the members are required to make their contributions as set out in the Memorandum of Association to cover any liabilities. Even if this contribution amount is zero, the members cannot write off debts in order to prevent the company from settling its liabilities in full.
A company limited by guarantee is not regulated on a sectoral basis but it must comply with the rules of the Companies Act 2006 and, where applicable, the Charities Act 2011 or any relevant solicitors’ regulation, depending on the nature of the company.
Key Elements of a Guarantee Company
A company limited by guarantee has several key features that distinguish it from other types of companies. As noted earlier, the primary purpose for its creation is generally not to make a profit. This leads to the limitations on share capital and the appropriate corporate structure that distinguishes it.
Unlike a company limited by shares, a company which is limited by guarantee does not have shares. Instead, its members or shareholders guarantee to pay a set amount if the company winds up. Because they do not have shares, they are not entitled to dividends. Thus, even though it may be set up as a limited company, it is still treated as a not-for-profit organisation.
Companies limited by guarantee do not issue shares to their members. Instead of members holding shares, they promise to contribute a stated sum of money to the company’s debts, in the event of it going into insolvent liquidation.
Companies limited by guarantee do not have owners, but instead have members. If the company goes into liquidation, the members are liable to contribute the fixed amount to however much the company owes.
Where the liability of members is fixed (for example, between €1 and €5), it will be evident on the front page of the company’s constitution, as this is required to be stated there. However, where the limit is more than that, it will not be stated in the constitution and merely having a guarantee to contribute is enough to limit liability to the amount guaranteed.
The members of a company limited by guarantee are not entitled to any distributions of income or capital. However, they do have the right to attend and vote at meetings.
A mandatory clause stating the amount to which each member is bound by guarantee must be included in the constitution of a CLG. To ensure compliance with the Companies Act, it is best to use the prescribed wording.
Normally, companies limited by guarantee carry a "not for profit" clause in their constitutions. This means, should the company go into insolvent liquidation, any surplus assets would not be available to the contributors of the guarantee. They cannot receive dividends and should any surplus arise it will go to another CLG or to the State.
Benefits of Guarantee Companies
When it comes to the advantages of a guarantee company, the first is that members are protected from liability. Once registered, a member is free from liability for the debts of the company. In addition, members of guarantee companies do not have shares, so there are no shareholdings to transfer, either to other members or to third parties, and thus no stamp duty will be payable.
The limited liability of the members makes it easier for members to go to third parties, such as banks, and it is easier to persuade them to part with their money without the underlying concerns of individual liability.
The perpetual nature of a company limited by guarantee makes it a popular choice for many charitable and not-for-profit organisations, in particular. Guarantee companies are viewed favourably by banks, charities and non-governmental organisations, so much so that it is often the preferred corporate structure over a charitable trust deed for that reason.
Another important feature of a guarantee company is that its members have no ownership rights in the common law sense. There are no shares to transfer, members cannot have dividends and they cannot directly take assets with them when they leave.
This is beneficial because it allows everyone to work side by side in the interest of the company, which is run by a its board of directors, with the mutual understanding that they will all leave at some point.
The absence of ownership rights also eliminates the possibility of a disgruntled member impeding the operation of the company by refusing to transfer their shares or accept the capital value of their shares. In addition, over the years, the Crown has amassed a significant body of case law, which provides a bank of information that can be used to fairly determine what the appropriate course of action should be.
Drawbacks to Consider
Companies limited by guarantee can have some disadvantages which should be given careful consideration prior to formation, in particular limitations in raising capital and ongoing administrative responsibilities. These factors may prevent the structure being suitable or convenient for every situation.
A not for profit company or non profit corporation in the USA is generally limited to raising capital from members in the form of dues or grants however, at times such companies may be able to engage in a private placement for investors.
Once the company is incorporated and operational there is the administration involved with preparing and filing reports under the Business Corporation Act and other regulatory bodies such as the Internal Revenue Service. Further, there is tax preparation involved which will require the services of an accountant.
If a not for profit company has an income exceeding $200,000 it will be subject to further obligations under the Securities and Exchange Act (SEC) and must file Form 990 together with other reporting. There are additional costs for such filings and of course accounting fees.
Once the company has gained tax exemption, dissolution of the company requires a super majority vote of the board of directors and shareholder approval. Further, because a company limited by guarantee does not have a share capital, members do not benefit from any appreciation which may occur if the company is dissolved.
It can take more time to establish a company limited by guarantee than an ordinary C corporation.
How to Form a Guarantee Company
Forming a Not For Profit / Charity Company Limited by Guarantee
If you have decided to form a company limited by Guarantee you will need to provide a copy of the articles of association when registering the charity/company with the Charity Commission/Companies House.
Although there is no legal requirement as to what must be included within the articles of association of your company, the majority of charitable companies use the Model Articles which are set out in Schedule 1 of the Companies (Model Articles) Regulations 2008.
While all charitable companies are not for profit, not all not for profits are charitable companies. If you think you want to register as a charity, you will need to be a charitable company limited by guarantee and so you will need to adopt the Association Charitable Company Limited by Guarantee Model Articles.
There are certain requirements that must be included within the articles for a company limited by guarantee which take the form of a memorandum and articles of association. This is because charitable companies are created under certain legislation pertaining to the registration of charities and they must state their purposes or "objects". Articles that do not have the required provisions may fail to achieve charitable status with the Charity Commission. The key provisions that you need to include within the articles of association are:
• A list of the purposes for which the company is formed
• The amount of the guaranteed liability by members in the event of dissolution
• How the members and directors are appointed and also how the rotation system works
• How the company will function
• Rules regarding the distribution of assets in the event of the company being wound up
• A statement explaining that on winding-up , trustees or members will contribute an amount not exceeding the guarantee money set out in the Articles plus applicable wind-up costs.
We advise that it is recommended to seek professional assistance with ensuring that the articles are drafted in a way that is suitable for the needs of your company. There are various types of model articles and you should contact one of our team who will advise the best articles for your not for profit company.
It is worth noting that when issuing shares for companies limited by shares, if the shares are issued at a discount to face value, the Companies Act 2006 requires that you obtain the consent of shareholders before doing so.
Companies House will register your new company online and you will need to provide the following information:
• The name of your company must end in "Limited", "LLP" or words which suggest limited liability. There are various other words that cannot be used in the name. You can check the availability of your proposed company name at the Companies House website. If you are unclear, give us a call or send us an email.
• Key information about your company such as the company’s registered office address, the full names of all directors and any company secretaries.
• Information about the shares in the company such as the total number and value.
• You also have to send a ‘Statement of Capital’ with your application. You can use the web incorporation service to answer some questions online to help you.
The Companies Registrar will send you a certificate of incorporation when you have registered your company. You will then have to register your small company accounts, including details of directors and secretaries, annual returns and any information about changes in the company. You can register online or by post.
Once the company is registered with Companies House, it can open its own bank account and as a result everyone’s costs will be kept separate. Also, it will keep accounting issues separate. The Company’s finance records should be kept in good order and audited accounts should be submitted every year to Companies House.
Compliance and Reporting for Guarantee Companies
As with all companies, a company limited by guarantee is a legal entity separate to its members and therefore has ongoing statutory reporting obligations, in addition to its compliance with the charitable and tax regulations that apply to charities. This includes:
• Forming an annual general meeting.
• Registering the annual return with the Companies Registration Office along with the required annual financial statement.
• Keeping a register of members and notifying the Companies Registration Office of any changes.
• Filing any charge or mortgage created by the company.
In addition, as a company limited by guarantee is, by definition a company, there will be many other obligations triggered by the fact that it is incorporated. A director of a company will have to ensure that he always acts:
• In the interest of the company;
• In a certain manner: so as to promote the success of the company; and
• Fairly between the members.
There will also be disclosure requirements around directors’ personal interests which must be registered and kept up-to-date. The financial statements, accounts, book keeping and audit requirements may differ depending on the size of the company. Companies limited by guarantee must also consult the guidelines for charities issued by the Charities Regulatory Authority.
Comparison with Other Business Entities
Compared to a company limited by shares, a company limited by guarantee is often less expensive to set up and will usually involve less paperwork and regulatory compliance. This is because a CLG does not have shareholders or stock, and being a non-profit organisation, the CLG also does not pay corporate taxes.
However, for profit-making entities, a company limited by shares (CLS) will likely be the most viable solution because a CLG will generally not be in the business of making profits, but is instead more commonly used for not-for-profits, charities, residents’ associations and sports clubs.
In terms of a partnership , a CLG will generally provide a structure where the owner’s liability is limited. However, a partnership (and limited partnership) is better known for the pass-through taxation structure, while a CLG will not necessarily have this feature.
A CLG is also different from a co-operative, which is often community-oriented or localised from its origins. A CLG has a wider remit, which may be international in scope.
In short, a company limited by guarantee is most likely to benefit those not-for-profit entities looking to provide limited liability protection to their members.