A company limited by guarantee is a type of limited company in the UK registered to advance the objectives of non-profits such as clubs, charities, societies or any other institution seeking to function under the protection of limited liability.
See also: What does limited liability mean?
Company Limited by Guarantee
As stated, a private company limited by guarantee is registered with Companies House, the official registrar of companies. Unlike a private limited company (ltd), the company does not have shareholders or a framework for raising funds through share capital. However, it has guarantors whose liability is limited to the value of the nominal guarantee they pledge.
Formation Requirements
- Company name, subject to the same rules as one limited by shares.
- Director and guarantor details, including name, date of birth, nationality, residential address, and service address. Guarantors can be individuals or a corporate body with perpetual succession.
- Governing documents, which include articles and memo of association.
- Details of persons with significant control (PSCs), including full name, date of birth, nationality, residential address, service address, nature of control, and three security details for online signature.
- A registered office address.
- Bank details.
- A service address for the initial subscribers, which will appear in the company public register.
- Standard Industrial Classification (SIC) code that describes the business activity.
Read also: Director Service Address vs Registered Office Address
Key Features
- The company is a legal person separate from its owners.
- Offers limited liability protection, restricting the liability of the members to the value of the guarantee provided at the point of formation.
- Incorporated and regulated by the Registrar, subject to the Companies Acts.
Company Structure
A company limited by guarantee works through the following structure —
- Directors (at least one) — Like a Ltd, members must appoint directors to manage its day-to-day operations.
- Committee and powers — Directors can delegate certain responsibilities to sub-committees.
- At least one guarantor — Similar to shareholders, they guarantee to pay a certain sum in case of insolvency.
- Meetings and voting — The members can attend meetings, vote, appoint, and remove directors.
- Company secretary — The CLG may opt to appoint a company secretary who helps the director oversee that the company complies with all statutory requirements.
- A service address for the initial subscribers appears in the company public register.
- Standard Industrial Classification (SIC) code that describes the business activity.
Filing Requirements
The CLG must file the following documents with the company’s Registrar —
- Annual confirmation statements
- Annual accounts
- Report company changes
- Accounts and company tax returns for HMRC
- VAT Returns, PAYE reports, and Self Assessment tax returns (as relevant)
The company must also maintain a register of members and a register of Persons With Significant Control.
Suitability
A company limited by guarantee is suitable for membership ventures seeking to pursue non-profit objectives for the benefit of the members under limited liability protection.
Company Limited by Guarantee Charity
Depending on the registration process, two main types of charity companies are limited by guarantee. These are —
- A charity company is a CLG registered with the Registrar and the Commission.
- Charitable incorporated organisation (CIO), a CLG registered only with the Commission.
Formation Requirements (Charity Company)
On the side of Companies House registration, the following are the requirements for registering a charity company.
- To register, it is essential to ensure the charity name is available by searching both the company and charity register.
- The directors of the CLG automatically become the trustees of the charity company, and new trustees can also be appointed to add to the number.
- Objectives must pass the public benefit test.
- Governing Documents, including the articles and memorandum of association.
- Registered office address and bank details.
Key Features
- The company is a separate legal entity from the trustees and guarantors
- Liability is limited to the value of charity assets
- A charity is answerable to both the Registrar of Companies and the Commission.
Structure
It works through the following structure —
- Trustees who are responsible for running the entity.
- Guarantors are members of a company limited by guarantee continue to support the objectives of the venture.
- PSCs or beneficial owners who exercise control over the company.
Filing Requirements
The CLG must file the following documents with the company’s registrar —
- Annual confirmation statements
- Annual accounts
- Report company changes
- Accounts and company tax returns for HMRC
- VAT Returns, PAYE reports, and Self Assessment tax returns (as relevant)
The company must also maintain a register of members and a register of Persons With Significant Control.
Read also: Your HMRC UTR Number Explained
Suitability
A charity company is suitable for individuals or entities seeking to implement projects or programs that benefit the public or a target population.
Difference between a Private Company Limited by Shares and a Company Limited by Guarantee
One of the key differences between a private LTD and a guarantee company is how the two legal structures treat profits. In a limited company, shareholders can opt to distribute profits to its members as dividends or reinvest them back into the company.
But, a company limited by guarantee is by nature a not-for-profit entity and the guarantors can only reinvest profits back into the business to finance their objectives but not withdraw as profits.
Yet, with the above differences, the two structures have the following similarities —
- Offer limited liability protection to the owners in case of insolvency. They will only be responsible for paying company debts up to the value of shares or guarantee.
- Registered and some of their pertinent details such as registered address, director information, shareholder and guarantor details, and filings are available in the companies register for public scrutiny.
- Are required to have one director, secretary (for public limited companies though optional for ltds and CLGs) and members (who act as shareholders and guarantors.)
- Established by a memorandum of association, signed by all the initial subscribers agreeing to start the business, and the articles outlining rights, responsibilities, and how the business will manage its operations.
- Require registered office address, director service address, and company name found to be available by searching the register.
- Have similar routes for dissolution, which can either be by voluntary strike-off, Members' Voluntary Liquidation (MVL) (for solvent companies), Creditors' Voluntary Liquidation (CVL) and compulsory Liquidation (for insolvent businesses).
For the most part, the same rules and regulations apply to companies limited by guarantee as to companies with a share capital.
See also: The Difference Between a Voluntary and Compulsory Strike Off
What is the process of forming a company limited by Guarantee?
Registering a company limited by guarantee requires the following —
- A company name: Use the uk company public register of companies to find the available and suitable name for your venture.
- Registered office and director service address for directors, shareholders and guarantors.
- Determine your SIC code aligned to the intended activities of your venture
- A limited company by guarantee must have at least one director and guarantor.
- Statement of guarantee indicating the circumstances during which each subscriber will pay the typically £1 nominal guarantee amount.
Can guarantors take a share of the profits?
No. Guarantors cannot take out a share of profits because the business structure is designed for non-profit ventures. In case there is surplus income, the entity is expected to reinvest the surplus back into the business. If the members ever decide to take out profits, the company will no longer be considered non-profit and will not be able to apply for charity status.
What is the difference between a shareholder and a guarantor?
What sets apart a shareholder from a guarantor is their role and expectations within different types of companies. Shareholders are associated with limited companies, whereas guarantors are found in companies limited by guarantee.
Shareholders hold ownership in LTDs and anticipate receiving dividends as returns on their investments. They have a stake in the profits and losses of the company based on the number of shares they hold.
On the flip side, guarantors are connected to companies limited by guarantee. Guarantors are not typically interested in profit-sharing or dividend distributions like shareholders; instead, they serve as a financial backup in case of financial difficulties for the company.
Why set up a limited company by guarantee?
Some of the reasons why members may opt to set up as a CLG include —
- Personal liability protection — By forming a CLG, the liability of the company’s members is limited to the amount they agree to guarantee in the event of insolvency, protecting personal assets from being used to settle company obligations.
- To pursue objectives that benefit society — The enterprise is able to operate as a legal unit while focusing on its core objectives without the pressure of maximizing profits for shareholders.
- Credibility — Being registered as a limited company can enhance the credibility and reputation of the organisation. It signifies a formal and transparent structure, which can be appealing to stakeholders, donors, and partners.
- Perpetual succession — It offers perpetual succession, meaning it can continue its existence regardless of changes in membership, a feature crucial for organizations with long-term goals and commitments.
Can a Company Limited by Guarantee Lose Its Charitable Status?
Technically, a CLG does not have charitable status, since it's only acquired after the non-profit is incorporated by the Charity Commission and transforms into a charity company. However, it may lose its right to incorporate into a charity if —
- Members take out surplus profits as personal income;
- If profits are distributed to members as a form of dividend payment.
If the company has already incorporated into a charity, it will lose its status if it takes any of the above actions or fails to —
- Adhere to its governing documents particularly pursuing its objectives.
- Comply with regulatory requirements such as filing confirmation statements and reports to the commission or the registrar of companies.
Can guarantors take a share as evidence of ownership?
No. A company limited by guarantee must not and cannot issue shares. The guarantors' evidence of ownership is found in the statement of guarantee, where they pledge to provide a nominal amount in case of insolvency.
The company’s memorandum of association that lists the subscriber agreement to form the venture also serves as proof of ownership. However, there is no stake given in terms of shares.
Is an article of association relevant to the formation of a not-for-profit company?
Yes, it is a compulsory governing document for uk non-profit company. It documents how the subscribers intend to manage the enterprise. It contains the following information —
- Directors powers, responsibility and scope for decision making;
- Process of obtaining membership and resigning
- Meetings
- Voting procedures
- Administrative arrangements
See also: Memorandum and articles of association 101
Guarantee companies vs companies with share capital
A CLG is like an ordinary private company limited by shares. However, unlike LTDs, a non-profit has no shares or shareholders and reinvests surplus income to enable the company to run its day-to-day activities. Yet, both entities are required by law to file accounts at the Companies Registration Office and submit annual returns. The CLG is set up for certain objects for the benefit of its members while an LTD is established primarily for profit-making purposes and to provide returns to its shareholders.
Can limited by guarantee companies have persons with significant control?
Yes. A CLG can have PSCs who exercise ultimate control over the company. Despite the unique structure of CLGs without shareholders or capital in the traditional sense, individuals within the organization can still qualify as PSCs if they meet the criteria outlined in the Companies Act 2006.
An individual or company who fulfils one or more of the following conditions qualifies as a PSC -
- Directly or indirectly holds more than 25% of the voting rights.
- Directly or indirectly holds the right to appoint or remove a majority of directors.
- Otherwise has the right to exercise significant influence and control.
Company name requirements for guarantee companies
CLG naming requirements are the same as the business name requirements for private limited companies. Your CLG name must not —
- Be too similar or identical to an existing corporation name;
- Imply any connection with the UK government, local authority or any agency;
- Include sensitive words like “Charity” without the appropriate permission;
- Be offensive, inappropriate or likely to cause harm; and
- Suggest criminal activity or be contrary to public interest.
What is the difference between a Charitable Incorporated Organisation (CIO), a Community Interest Company (CIC) and a Company Limited by Guarantee (CLG)?
The main difference between a CIO and a CIC lies in their legal structure and statutory oversight as explained in the table below.
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