About companies limited by guarantee

What is private company limited by guarantee?

A limited by guarantee company is a type of incorporated business structure that is predominantly used by non-profit organisations, social enterprises and charities. A non-profit business is typically a community group, voluntary organisation or a type of enterprise that generates income for social, charitable or community-based objectives. Profit-making businesses can also set up this type of company, but a limited by shares company structure is more suitable for commercial businesses, because profits can be distributed to members (shareholders) as dividends.

Companies limited by guarantee have to be incorporated with Companies House, but they do not have any shares, nor do they have any shareholders. The owners (‘members’) of limited by guarantee companies are legally bound by financial guarantees rather than shares. This is because surplus business income is not usually distributed to guarantors. Instead, it is normally retained by the company to achieve the non-profit or charitable aims of the organisation.

Similar to a limited by shares structure, a limited by guarantee company is a distinct entity in the eyes of the law; therefore, the company is responsible for its own assets, surplus income and debts. The company members, known as ‘guarantors’, are protected by limited liability, which means their financial obligation to the company is limited to what they have guaranteed to pay in the event of insolvency. Members have no legal responsibility for the debts of a business above and beyond the sums stated in their guarantees.

Who owns a limited by guarantee company?

Limited by guarantee companies are owned by members. These members are referred to as ‘guarantors’. No shareholders are required in this type of company. A company limited by guarantee can be owned by one guarantor or lots of guarantors, so you can register the company on your own or with other members.

To become a guarantor, you must promise a certain amount of money to the company. This financial promise is known as a ‘guarantee’, and it is payable if the company cannot pay its bills. Each guarantor will sign a guarantee statement during the company formation process (or agree to the statement if the company is registered online). In most cases, a guarantee is simply a nominal sum of £1 per member.

Who manages a limited by guarantee company?

A company limited by guarantee must appoint a minimum of one director to manage day-to-day business operations and finances. It is commonplace for guarantors to be directors; therefore, a company can have just one director and guarantor, or it can have lots of directors and guarantors.

Limited by guarantee or limited by shares?

A limited by guarantee company is the most suitable company structure if you want to set up any kind of non-profit organisation for the benefit of individuals, the local community or greater society. This could be a charity, a social enterprise, a cooperative or club, a membership organisation or any other type of self-sustaining venture whereby you intend to create income only for the advancement and promotion of the company’s non-profit objectives, rather than as a source of personal income for yourself and other members.

A limited by shares company structure is better suited to profit-making businesses because any profit that is left in the business bank account can be distributed to members in the form of dividends. These payments are worked out in relation to the quantity of shares held by each member, thus making it easy to work out the percentage of profit each shareholder is entitled to receive. Limited by guarantee companies do not have shares; therefore, they cannot distribute profits as dividends.

Limited by guarantee company or limited liability partnership?

A limited by guarantee company is appropriate for anyone who wants to set up and run a not-for-profit organisation or social enterprise - either on their own or with other people - whilst protecting their personal liability and increasing the professional credibility of their venture.

An LLP is not a suitable model for non-profit organisations or charities - this type of incorporated structure is designed for groups of two or more people who want to set up and run a commercial (for-profit) partnership and reduce their personal financial liability. Typically, solicitors, lawyers and accountants will set up LLPs because these types of professions traditionally operate as partnerships.

Pros and cons of limited by guarantee company formation

Pros Cons

Limited liability

Guarantors are protected by limited liability, because a company exists as a separate legal entity. Each guarantor's financial responsibility for company debts is limited to their guarantees, which are normally £1.

Strict regulation

Limited by guarantee companies have to be incorporated with Companies House and must comply with strict reporting and filing regulations.

Professional image

Non-profit organisations that are set up as limited companies are usually viewed more favourably than their unincorporated counterparts, because:

  • Information about the company is available to view on public record, which enables potential donors, supporters and other third parties to make informed decisions about their involvement in, and advocacy of, your venture or cause.
  • Limited company status demonstrates commitment and creates a credible image.
  • Individuals are other organisations are more likely to trust a limited company and feel confident about your ability to meet expectations.

Reporting requirements

Limited companies must adhere to strict filing and reporting requirements for Companies House and HMRC:

  • An annual return must be filed with Companies House at least once every 12 months.
  • Financial accounts must be prepared for Companies House and HMRC.
  • A Company Tax Returns must be completed every year for HMRC.
  • Directors are required to file Self-Assessment tax returns for HMRC every year if they receive salary payments.
  • Any changes to a company’s registered details must be reported to Companies House and, in some cases, HMRC.

Seperate legal entity

An incorporated company exists as a distinct legal entity that can own property, enter into contracts, employ people and be held accountable for its actions and debts.

Penalties

Failure to deliver statutory information to Companies House and HMRC can result in high penalties.

Funding opportunities

Incorporated organisations often find it easier to obtain loans from banks and lenders, and funding from other third parties.

Equity investment

Companies limited by guarantee cannot issue shares in return for equity investment in the business.

Flexible membership

A limited by guarantee company may be owned and operated by one person. There is no restriction to the number of owners it has above this number, which means a company can be registered with multiple members and directors, and additional members and directors can join a company after incorporation.

Disclosure of information

Corporate information is fully disclosed on public record. This includes details of guarantors, directors, financial accounts, liabilities, permitted and/or restricted activities and any profit distribution clauses.

You must make your company’s statutory records available for inspection at your registered office if a request is made by HMRC or any member of the public.

Trading purpose can be altered

You can go from a non-profit venture to a profit-making business after incorporation by altering the articles of association. There is no need to dissolve the company and incorporate a new one if you decide to change the purpose of your business.

Fees

An incorporation fee must be paid in order to register a limited company.

You will have to pay a fee to Companies House when you deliver annual accounts. A small fee is also charged if you change the name of your com-pany.

Protected company name

The name of your limited company will be protected until it is dissolved - no other business will be allowed to register or use the same name as long as your company remains in existence.

Accounting requirements

Record keeping and accounting requirements can be complex due to strict statutory regulations and reporting standards. You may need to hire an accountant to help you.

How to register a company limited by guarantee

You can set up a company limited by guarantee by completing an online or postal application form for Companies House. Online registration through a company formation agent is the easiest and most popular way to set up a company - as it requires no paperwork and no signatures. The whole process is completed electronically in a few minutes, and applications are usually approved in less than 3 hours.

To register a company online, you will have to:

  • Choose a unique company name and add ‘Limited’ or ‘Ltd’ at the end (unless exemption applies)
  • Provide a registered office address - this will be the official address of your company that will appear on public record. You must choose an address that is in the same part of the UK as your company incorporation (England and Wales, Scotland and Northern Ireland)
  • Appoint at least one director
  • Have one or more guarantors, each of whom must agree to the statement of guarantee
  • Adopt the Model Articles of Association, or upload altered/bespoke Articles that comply with company law
  • Provide a service address for each director

Your limited by guarantee will be ready to start trading as soon as Companies House approves your application and provides you with your certificate of incorporation.

Exemption from including ‘limited’ in a company name

The vast majority of private limited companies in the UK must add ‘Limited’ or ‘Ltd’ at the end of their names. Companies registered in Wales are permitted to use the Welsh equivalents ‘Cyfyngedig’ and ‘Cyf.’ You can apply for exemption if your company is limited by guarantee and its articles of association states that the company:

  • Has objects of promotion or regulation of commerce, art, science, education, religion, charity or any profession;
  • Is required to spend its income on promoting its objects;
  • Is unable to distribute income to its guarantors;
  • Requires each member to contribute to company assets if it is wound up during their membership, or within a year of them terminating their membership.
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