Many charities, clubs and societies are private companies limited by guarantee. They’re often ‘not for profit’ organisations, meaning that if they make profits, they don’t pay them out to their members. Instead, they put this money towards the company’s operations or goals.
The main reason you’d set up a company limited by guarantee is to protect the organisers from personal liability for the company’s debts. Another reason is that informal clubs and other associations can’t enter into contracts or employ staff. Once they register as a company, they become legal ‘persons’ in their own right, and can sign legal agreements and be bound by them.
So, if you’re thinking of setting up a not-for-profit or running an organisation that’s keen to expand, a private company limited by guarantee may be a good choice. In this guide, we take a look at the rules governing guarantee companies and compare them with private companies limited by shares.
- What is a private company limited by guarantee?
- What are companies limited by guarantee used for?
- How to set up a private company limited by guarantee
- How to register a company limited by guarantee
- What are the advantages and disadvantages of companies limited by guarantee?
- Can companies limited by guarantee pass written resolutions?
- Who are the members of private companies limited by guarantee?
- Who owns a company limited by guarantee?
- Can a private company limited by guarantee have share capital?
- Can I convert a guarantee company to a share company?
- Can my guarantee company’s name not include the word ‘limited’?
- How to wind up a private company limited by guarantee?
- Limited by shares Vs limited by guarantee
What is a private company limited by guarantee?
A private company limited by guarantee is a type of company normally set up by non-profit making organisations like charities, clubs and associations. A company limited by guarantee doesn’t have shares or shareholders but members, rather like a club. When someone signs up to be a member of a guarantee company, they agree to guarantee the company’s debts up to a certain nominal amount, normally £1.
A company limited by guarantee is a legal person in its own right, so it can enter into contracts, employ staff, and so on. If it’s profitable, these profits are generally re-invested, but they can be distributed to members. This isn’t possible however if the company is a charity (it would lose its charitable status), or if its Articles of Association prohibit it.
A company limited by guarantee must have at least one director and one member (though this can be the same person). The directors have the same duties to the company as the directors of share companies.
What are companies limited by guarantee used for?
Companies limited by guarantee are often used when an organisation like a club needs to enter into a lease, purchase supplies, or employ staff. Because the members of the organisation don’t want to be personally liable under these contracts, they form a company limited by guarantee. This type of company is simpler to run than a share company, as there are no shares to issue and it’s easy for members to join and leave.
It’s quite common that community projects, clubs and charities end up with substantial assets, and unless you form a limited company, those people running it (the management committee) can be made personally liable for debts. The managers may have entered into leases or raised finance for equipment. If the income suddenly drops, for example, because the company loses a government grant, then the committee members will have to meet the liabilities incurred under these contracts.
A guarantee company isn’t normally the right choice for a business, as there will be limited working capital. The day-to-day activities of the company are financed by the members, plus any funding the company can generate. Any profits after the company has paid its costs and expenses are usually ploughed back into the enterprise so that it can fulfil its objectives described in the Articles.
These are the kinds of organisations likely to be established as a company limited by guarantee:
- Charities, that will also be regulated by the Charity Commission. Profits are retained within the company for its use.
- Property management companies, for example those used to manage blocks of flats. The freehold is often owned directly by the company, with the tenants becoming members of the company. When a tenant leaves, he or she simply resigns their membership, so it’s much simpler to manage than a company limited by shares.
- Public sector bodies set up by central or local government to manage all or part of their functions such as social housing, social care, childcare and transport.
- Clubs and private associations.
- Trade associations and research bodies.
- Schools, colleges, and religious institutions.
How to set up a private company limited by guarantee
Just like share companies, you can set up a guarantee company by registering it at Companies House. You’ll need to complete Companies House forms and provide details of:
- The names and addresses of the directors and guarantors, and information about People with Significant Control (PSCs). You will also have to provide their countries of residence, nationality, date of birth, addresses and occupations. While this information is normally made public, you can choose that these addresses be kept private, or provide an address where formal notices can be served.
- The company’s name. This mustn’t be similar to another name already on record (you can search here to check), and not be misleading (too similar to another, well known, company for example) or offensive.
- A registered office address for correspondence and legal documents.
- The statement of guarantee, with the amount of the guarantee given by each member.
- The type of company (limited by guarantee), and the nature of the company’s activities, represented by a ‘SIC’ code.
- The memorandum and Articles of Association that contain the agreement of the members to set up the company, the rules and regulations by which the company will be managed, and whether it’s a not-for-profit.
You can set up your guarantee company with standard articles, or these can be tailored to suit your needs. Companies limited by guarantee don’t need to have a company secretary but can choose to do so. Members can include limited companies.
Guarantee companies have directors just like share companies (they’re sometimes called ‘trustees’, and you have to file annual accounts at Companies House just like share companies do.
How to register a company limited by guarantee
You register a company limited by guarantee by filing a memorandum and articles of association at Companies House. The memorandum simply states that the members wish to form a company, become members, and the amount of the guarantee. The Articles describe how the company will be managed (for example how members join and leave, how meetings will be run, the voting rights and procedures, and how directors and officers are appointed). The Articles also say what the company has been set up to do. In the case of charities, this must be for a charitable objective.
You can choose to adopt model articles for your company limited by guarantee. These are similar to those for companies limited by shares. If you are intending to be a charity, there are model articles published by the Charity Commission. If you don’t adopt bespoke article for your company, then the model articles will apply by default.
What are the advantages and disadvantages of companies limited by guarantee?
- Members are protected from financial risk and aren’t liable for the company’s debts, barring fraud.
- Limited company status gives credibility to the organisation, and this can be useful if you’re keen to promote the company’s objectives and status.
- A company can enter into commercial contracts and employ staff.
- There will be costs and expenses to set the company up and administer it.
- There are ongoing filing requirements at Companies House, and someone will need to take responsibility for this.
- It can be difficult to keep track of members who may move to a new house or otherwise can’t be contacted. This can be a major issue if there’s a dispute, or where the company owns valuable assets and is wound up requiring the proceeds to be distributed to members.
Can companies limited by guarantee pass written resolutions?
There are set procedures laid down in law that govern how a guarantee company passes written resolutions. You can’t override this process in your company’s Articles or use a written resolution to remove a director or the auditors from office before their term has expired.
Either the board of directors or the members can propose or circulate a written resolution.
If the directors propose a written resolution, this must be sent to every eligible member at the same time, contain details of how members can agree or it, and the date by which it must be passed.
Members can require a written resolution to be circulated to members if:
- They hold 5% or more of the total voting rights (or fewer if this is set out in the articles).
- The resolution is not defamatory, frivolous, or vexatious.
- The request and any accompanying statement are authenticated.
You need to send the request for a written resolution by letter, or by email or other electronic method. If you meet the legal requirements described above, the company must circulate the request to every eligible member within 21 days of the requirements being met. Those making the request must pay the company’s expenses relating to it. The auditors are also entitled to receive a copy of all communications relating to the request.
When you send a copy of the resolution to members, you must also include a guidance document that tells them how they can agree to it, and the date by which it must be passed.
Written resolutions are passed when enough members have agreed to it (51% for ordinary resolutions). If you haven’t met the procedural requirements, the resolution will still be valid, but you’ll have committed a criminal offence. You must keep copies of written resolutions for at least ten years, and special resolutions will need to be filed at Companies House.
Who are the members of private companies limited by guarantee?
The first members of a company limited by guarantee are those identified in the memorandum of association when the company is incorporated. New members must be entered into the register of members kept by the company.
The Articles will describe the characteristics required of members, such as any qualifications they have to hold. You can’t discriminate though in terms of sex or race for example, unless you’re a charity set up for particular purposes relating to that characteristic.
Under the model articles, the directors have to approve each member. New members need to fill out an application form, and often pay a membership fee. This enables the company to have some working capital to cover running costs. Members don’t need a membership certificate.
The model articles provide that a member may give at least seven days’ written notice to withdraw from the company. Membership isn’t transferable, and will end once the member dies (or, in the case of a company, it ceases to exist). The Articles may also provide that membership ends if the fees have not been paid, or the member becomes bankrupt or loses their membership qualifications. There may also be power in the Articles to expel a member in certain circumstances.
It’s possible to have different classes of members, for example if certain members pay higher fees, or have particular qualifications. Some members, such as junior members, may be allowed to be members, but not be able to vote on company decisions.
Who owns a company limited by guarantee?
If the company’s constitution allows it, minors can be members of a company limited by guarantee. Individuals, and also companies and other legal persons, can be company members.
Can a private company limited by guarantee have share capital?
Companies limited by guarantee can’t be set up with share capital. Those that still exist (before 1980), have a set amount of nominal capital, divided into shares of a fixed amount.
Can I convert a guarantee company to a share company?
Yes, you can. The simplest way is to set up a new share company and transfer the assets of the guarantee company to it. If you want to keep the name of the company limited by guarantee, you can change it to another name before you set up the new share company. That way, the original name is available at Companies House for the new company.
Can my guarantee company’s name not include the word ‘limited’?
If you don’t want your guarantee company’s name to include the word ‘limited’, then there are certain rules to follow (a ‘Section 60 exemption’). You must:
- Set the company up with objects that are restricted to those promoting commerce, art, science, education, religion, charity, or any profession.
- Provide in the Articles that the profits must not be distributed to members.
- Provide in the Articles that when it’s wound up, its assets must be transferred to a similar type of body.
How to wind up a private company limited by guarantee?
The procedure for winding up a private company limited by guarantee is the same as that for those limited by shares.
Just like share companies, guarantee companies may become insolvent, for example if they lose sponsorship, their fundraising activities or membership fees are not sufficient, or if they lose other types of income streams such as government grants.
Because there are often a large number of members, it can be more difficult to arrange a meeting to pass the necessary resolution to wind up a guarantee company. All members have an equal vote, unless otherwise set out in the articles, and a 75% majority in attendance at the necessary meeting is required.
Limited by shares Vs limited by guarantee
|Company limited by guarantee||Company limited by shares|
|Are members liable for the company’s debts?||Yes, but only up to the amount of the guarantee (a nominal amount per person)||Yes, but only up to the nominal amount of the shares|
|Do members have to contribute to the capital of the company?||No||Yes, but only to the extent of their shares|
|Do the members’ contributions form an asset of the company?||No||Yes, the share contribution forms part of the working capital|
|Must the word ‘limited’ form part of the company name?||No, if certain requirements are met||Yes, other than in very limited circumstances|
|Can membership of the company be bought and sold by members of the public?||No||Yes, if the company is a public company|
|What are suitable uses for the company?||Not for profits, clubs and associations||Trading organisations|