A company limited by guarantee is a lesser known type of business entity which is generally formed by non-profit purposes and has members instead of shareholders.
There are both some similarities and differences between the two groups.
Members and shareholders enjoy limited liability, however in cases where a share based company is liquidated; the latter might be required to pay all amounts of unpaid monies relating to the shares they hold.
For example, if an individual shareholder holds 100 shares of £1 each, all of which remains unpaid at the time of dissolution, then they would be required to pay £100 to the company.
Most companies limited by guarantee have a constitution which states that each member is only required to pay £1 should it be dissolved.
Assuming that an average shareholder holds more than one share in a company, members in a business limited by guarantee do appear to have less risk attached to their positions.
Profit Making Status
Perhaps the most fundamental difference between the two types of limited companies is that those with shares generally exist for profit making purposes.
Companies limited by guarantee however, are non-profit making organisations and are usually registered to provide a specified service to the public or a particular segment of the population.
The memorandum and articles of association of each would also differ as companies limited by shares usually have very general objects clauses which allow them to pursue any legal trade or activity.
Objects of companies limited by guarantee
Companies limited by guarantee however, often have very specific objects and detailed rules pertaining to which areas they can engage in.
Charities, which are often of this type, might have restrictions imposed on them by their major donors who wish to ensure that their donations will be spent according to their wishes and not in a manner which they would not approve.
By having a defined set of objects, companies limited by guarantee which are seeking to raise funds might find it easier to do so because they would be able to demonstrate that sufficient restrictions exist to protect the donor’s intentions.
Removing the Word Limited
Companies limited by guarantee can have the word “limited” removed from their name under section 30 of the Companies Act.
Company directors, secretary and declarant
Both types of companies are bound by the same requirements to have at least one director, a secretary and a declarant at the time of incorporation and throughout any period of its existence.
When forming a company limited by guarantee, members are listed in the same manner in which shareholders would be, even though no allotments are made to them.
