Company limited by guarantee

3 key takeaways

• A company limited by guarantee is commonly used for non-profit organizations.
• Members act as guarantors and agree to contribute a specific amount if the company is wound up.
• This structure separates personal liability from organizational liabilities, providing protection to its members.

What is a Company Limited by Guarantee?

A company limited by guarantee is a legal structure often adopted by non-profit organizations, charities, clubs, and other entities that do not distribute profits to shareholders. Instead of having shareholders, this type of company has members who agree to contribute a certain amount (usually a nominal sum) towards the company’s liabilities in the event of its liquidation. The primary purpose of such companies is to reinvest any profits back into the organization’s objectives rather than distributing them as dividends.

Importance of a Company Limited by Guarantee

• Non-profit Focus: Ideal for organizations whose primary goal is not profit distribution but achieving specific missions, such as charitable activities, education, or community services.
• Limited Liability: Members’ liability is limited to the amount they agree to contribute, protecting their personal assets.
• Credibility: Provides a formal and recognized structure that can enhance the credibility and trustworthiness of the organization.

How a Company Limited by Guarantee Works

Membership Structure

Instead of shareholders, the company has members who act as guarantors. Each member’s guarantee is a fixed nominal amount, often as low as £1. This guarantee is the extent of their financial liability to the company.

Articles of Association

The company’s articles of association outline the rules and regulations governing the company, including the objectives, member responsibilities, and procedures for meetings and decision-making.

Non-profit Operation

Any profits made by the company are reinvested back into the organization to further its objectives. Members do not receive dividends or share profits.

Governance

The company is managed by a board of directors or trustees who are responsible for the day-to-day operations and strategic direction. Members typically have the right to vote on significant decisions, such as changes to the articles of association or the appointment of directors.

Dissolution

If the company is wound up, members are required to pay the amount they guaranteed. This amount is used to settle the company’s debts and liabilities. Any remaining assets are distributed according to the company’s articles, often to another non-profit organization with similar objectives.

Examples of a Company Limited by Guarantee

• Charitable Organizations: Many charities adopt this structure to ensure that their mission remains focused on charitable activities without profit distribution.
• Community Groups: Local clubs and community groups often use this model to manage their operations while protecting members from personal financial liability.
• Educational Institutions: Some private schools and educational institutions are set up as companies limited by guarantee to ensure that any profits are reinvested into educational activities.

Real-world Application

• Charity Commission (UK): Many charities in the UK are registered as companies limited by guarantee, which allows them to gain credibility and access to certain funding opportunities.
• Non-Profit Organizations: Organizations focused on social, cultural, and environmental missions use this structure to legally organize their operations and ensure that profits are used to advance their causes.
• Professional Associations: Certain professional bodies and trade associations use this structure to manage their affairs while limiting the liability of their members.