What is a company limited by guarantee?

Understanding a private company limited by guarantee

A company limited by guarantee has guarantors rather than shareholders, and isn’t usually established to make a profit. It’s a legal structure that offers protection from financial liability to the individuals involved in the company.

Any profits that are made aren’t distributed in the same way as a company limited by shares. They may be retained for future use by the company, for example, or used to market and promote the organisation’s work or purpose.

What type of organisations are limited guarantee companies?

These are just a few examples of organisations that might choose the limited by guarantee corporate structure:

• Non-profit organisations
• Charities
• Sports clubs
• Trade and other associations
• Schools and colleges
• Community groups

What is the structure of a company limited by guarantee?

Members of a company limited by guarantee are called ‘guarantors.’  They can be individuals or corporate bodies, but their names and details are included on the register at Companies House.

Directors are appointed, and they run the company in the same way as a company limited by shares, although the overall purpose is very different. The financial liability of members is limited by the pre-set guarantee value, which is often £1, and a ‘statement of guarantee’ from each member is lodged with Companies House on formation.

Requirements for establishing a company limited by guarantee

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• Registering with Companies House
• Providing a registered office address
• Using Standard Industrial Classification (SIC) codes, which identify the type of activities the company undertakes
• Appointing at least one guarantor and one director, although one person can combine these roles
• Providing details of People with Significant Control (PSCs) – these are typically directors and guarantors
• Developing a Memorandum and Articles of Association
  - The Memorandum details each member of the company, and the fact that they have agreed to become members
  - The Articles of Association set out the regulations and rules by which the company will operate, typically including the powers held by directors and a dispute resolution procedure

What are the benefits of setting up a limited guarantee company?

• The company is a separate legal entity and members benefit from limited liability to the level of the pre-set guarantee. Consequently, they don’t have to worry about personal liability for any future company debts.
• The limited guarantee structure improves credibility and instils confidence in stakeholders. If the organisation needs external support, for example, the status conveys a professional and stable organisation with a defined purpose.
• There’s no hierarchy within the company based on shareholding, as is the case with companies limited by shares. Each member is equal in standing to the others, and has equal rights.

Are there any disadvantages to forming a company limited by guarantee?

Potential disadvantages could include:

• The requirement for members to file annual accounts and returns with Companies House and HMRC, as well as notify Companies House of any changes to the registered address of guarantors/directors
• The annual costs of running a company limited by guarantee are higher than those of a voluntary organisation
• The requirement to keep proper accounting records and file statutory accounts and returns may become onerous

A key feature of a company limited by guarantee is its separate legal status, which offers protection to members. Essentially, it is responsible for its own debts in the majority of cases. An example of when a director or guarantor may become financially liable for the company’s debts includes where misdemeanour has taken place, such as misappropriation of funds.

UK Liquidators can provide more information on this, and companies limited by guarantee in general. Please contact our expert team to arrange a free, same-day consultation – we work from offices located throughout the UK.