What Is A Company Limited By Guarantee?
Two types of private companies used within the UK are companies limited by shares and companies limited by guarantee.
Private companies limited by shares are owned by shareholders with certain rights, such as voting on matters in general meetings. These shareholders have limited liability toward the company, meaning they pay a set price for their shares (typically a nominal amount, such as £1), and their liability is limited to this amount should the company have difficulty, such as debt.
However, a private company limited by guarantee does not have any shares or shareholders; instead, it has members who provide a guarantee for the amount of money they are willing to pay should the company run into difficulty. If required, the guarantor must pay the full amount they have guaranteed. Typically, this is a small sum.
This is the largest difference between a company limited by guarantee and a company limited by shares.
Why would you register a company limited by guarantee?
Typically, companies limited by guarantee are used for setting up and running a charity, sports club, or other businesses where a large amount of capital is not needed.
There are three main reasons why a company limited by guarantee is used:
- The business doesn’t need a significant amount of capital.
- The business intends to re-invest the profits into the business to promote its objectives.
- The business wishes to have a clear structure for running and management of the business.
These companies can be set up to make and distribute profits; however, a company limited by shares is the better set-up for these situations.
Who are the directors of a company limited by guarantee?
All companies must have at least one director, this is also true for companies limited by guarantee.
The first directors are those specified in the company documents when it’s formed, the Articles of Association will then specify rules relating to the appointment, termination, and pay for directors.
How do you form a company limited by guarantee?
Companies limited by guarantee are formed similarly to companies limited by shares. The following documents are filed with the registrar:
- An application form to form a company
- The Memorandum of Association for the company
- The Articles of Association for the company
A fee must be paid to file these documents and incorporate the company.
What information is needed in the application form?
When filling out the application form, the following information must be provided, otherwise the application will be rejected:
- The names and addresses of the director(s), including their country of residence, nationality, date of birth and occupation.
- The names and addresses of guarantors.
- The names and addresses of any People with Significant Control (PSCs) and information about the extent of their control.
- A unique and inoffensive company name.
- Details of the registered office.
- A statement of guarantee, which is the guarantee given by each member of the company.
- The company’s Standard Industrial Classification (SIC) code.
If any of this information is omitted, or if the company name is found to be offensive, the registrar will reject the application.
What is the Memorandum of Association?
The Memorandum of Association is a simple document that typically states the name of the company, the names of any subscribers to the memorandum, a statement that they agree to become a member of the company and the date.
What are the Articles of Association?
The Articles of Association contain the provisions relating to running the management of the company, such as the director’s powers and responsibilities, the voting rights at general meetings, and the appointment of directors.
Can a company limited by guarantee use the Model Articles?
It is possible for a company limited by guarantee to use the Model Memorandum and Articles of Association. However, these are simple documents and may not be appropriate for use with all companies.
When shouldn’t a company limited by guarantee use the Model Articles?
It is possible to adopt bespoke articles if the model ones are unsuitable for the company. This typically happens when:
- There will be alternate directors
- The directors have restricted powers
- The directors are granted additional powers
- Provisions need to be removed that prevent a director from having voting rights if they have a conflict of interest
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