Limited by guarantee companies are most often formed by non-profit organisations such as sports clubs, workers’ co-operatives, and membership organisations, whose owners wish to have the benefit of limited financial liability.
A company limited by guarantee does not have any shares or shareholders (like the more common limited-by-shares structure) but is owned by guarantors who agree to pay a set amount of money towards company debts.
Furthermore, there will generally be no profits distributed to the guarantors as they will usually be re-invested in the business to help promote the non-profit objectives of the company. If any profits are distributed to the owners, then the company will forfeit its right to apply for charitable status.
What do clubs, student unions, property management companies, sports associations, workers’ co-operatives, social enterprises, NGOs, charities, and some political parties have in common? They are all set up as private companies that are limited by guarantee.
In this guide, we will focus on the purpose of a private company limited by guarantee, the types of businesses that use this structure, how to form a company of this type, and the difference between a company limited by guarantee and a company limited by shares.
What is a company limited by guarantee?
This type of company is typically formed by non-profit making businesses such as charities, clubs, and societies. Unlike a private company limited by shares, a private company limited by guarantee does not use shares nor have shareholders: Instead, it has “members”. Strictly speaking, a company that is limited by guarantee will have at least one director and one member.
A company is limited by guarantee “if their liability is limited to such amount as the members undertake to contribute to the assets of the company in the event of its being wound up”. In other words, it limits the liabilities of members for the company’s personal debts if it is wound up, as defined in the company’s “statement of guarantee”.
The profits of a private company limited by guarantee are typically reinvested into the business but, in some cases (although not for charities) these may be split between the members if this is permitted by the Articles of Association.
A private company limited by guarantee will typically have the following characteristics:
- Zero share capital – companies limited by guarantee have no share capital.
- Liability on members-only when winding up – members are not liable to contribute to the capital of a company limited by guarantee while it continues to operate as a going concern. They will be liable, however, when the company is wound up.
Why form a private company limited by guarantee?
There are several benefits to forming a private company limited by guarantee, including:
- Allowing clubs and associations to form a legal entity to enter into contracts.
- The liability of management committees for debts is limited.
- A private company limited by guarantee requires less administration, does not involve the transfer of shares, and enables members to join and exit the business with relative ease.
- It is possible for the business to enter into agreements, such as for the provision of services, purchasing of goods and services, leasing premises, or employing staff, whereby the member’s liability for those contracts is strictly limited.
- Provides reassurance to other businesses and investors.
Companies limited by guarantee are commonly set up where there is no imminent requirement for capital to fulfill the aims of the business. This is because whereas shareholders would contribute capital in a company limited by shares, in a company limited by guarantee, no contribution occurs while it is a going concern. As a result of the limited availability of working capital, a company limited by guarantee is not a suitable business structure for a more common commercial entity whose main aim is to generate profit for the benefit of its shareholders. As such, this is a major factor when deciding which type of company to form.
For what types of business is a private company limited by guarantee suitable?
Companies limited by guarantee are often used when an organisation like a club needs to enter into a lease, purchase supplies, or employ staff. Because the members of the organisation don’t want to be personally liable under these contracts, they form a company limited by guarantee. This type of company is simpler to run than a share company, as there are no shares to issue and it’s easy for members to join and leave.
It’s quite common that community projects, clubs, and charities end up with substantial assets, and unless you form a limited company, those people running it (the management committee) can be made personally liable for debts. The managers may have entered into leases or raised finance for equipment. If the income suddenly drops, for example, because the company loses a government grant, then the committee members will have to meet the liabilities incurred under these contracts.
A guarantee company isn’t normally the right choice for a business, as there will be limited working capital. The day-to-day activities of the company are financed by the members, plus any funding the company can generate. Any profits after the company has paid its costs and expenses are usually ploughed back into the enterprise to fulfill its objectives described in the Articles.
The private company limited by guarantee business structure is most commonly used by:
- Clubs and societies – not all clubs and societies will form a company limited by guarantee but, where they need to form a legal entity to enter into contracts while limiting liability for members, it can make strong sense to do so.
- Trade and research associations – these are not-for-profit organisations set up to further the interests of members (e.g. by setting standards or lobbying the government, or providing training) rather than being profit-generating businesses.
- Community Interest Companies – CICs typically have a social and community agenda working in areas such as food, housing, and leisure services.
- Academies, schools, and churches – again, not all of these types of organisations are set up as companies limited by guarantee but, if they need to form a legal entity to enter into external agreements, this allows them to do so.
- Charities – charities will have Articles of Association that specifically prohibit the provision of profits to members. Profits are retained within the company for its use.
- Property management companies – this business structure is often used where a freeholder decides to form a company entity to which the title of the property is associated and under which the property is managed. In this case, it may be that each property owner becomes a member and, when a property is sold, a member can easily be removed and a new one added.
- Commonhold associations – in situations whereby land is owned as commonhold, a commonhold association is typically formed as a company limited by guarantee.
- Public sector bodies are set up by the central or local government to manage all or part of their functions such as social housing, social care, childcare, and transport.
- Trade associations and research bodies.
- Religious institutions.
What is a “statement of guarantee”?
When a private company limited by guarantee is initially formed, its members (note they are not called shareholders) enter into an agreement referred to as a “statement of guarantee”. Within a statement of guarantee, each member declares that if the company is wound up, and if they are still a member (or within a year of them no longer being a member), then they will contribute to the assets of the company. They will only need to contribute, however, if:
- There are debts and liabilities which were incurred by the company before it stopped being a member.
- There are costs and expenses that are owed for covering the process of winding up the company.
There are several re-registration procedures for changing one type of company into a different type, but companies limited by guarantee are not included. However, such a change can still be made by transferring the assets to a new company that is limited by shares.
Who owns a company limited by guarantee?
A company limited by guarantee is owned by individuals and/or corporate bodies known as ‘guarantors’. Guarantors do not have any shares in the company and, generally, they do not take any of the profits. The owners of a company limited by guarantee will agree to pay a sum of money, known as a ‘guarantee’, if the company has any debts or becomes insolvent.
Who can be a guarantor?
A guarantor can be any person or a corporate body. Their details will be registered with Companies House and displayed on public records.
How many people will I require to register a company limited by guarantee?
You will need at least one director and one guarantor – but, one person can assume both positions so you could start a company on your own. Alternatively, you can have multiple directors and guarantors. The choice is yours.
Can guarantors take a share of the profits?
Guarantors can undoubtedly take a portion of company profits for themselves, but most of the time this does not happen because limited-by-guarantee companies are usually set up for non-profit purposes. This means that all of the money generated by this type of company is kept in the business or used to promote its non-profit purpose and activities.
If guarantors do keep any profit for themselves, the company will no longer be considered ‘non-profit’ and it will be ineligible for charitable status. There is nothing to prevent someone from setting up this type of company to run a profit-making business in which the guarantors will keep the profits, but a limited by share structure simply makes more sense for that purpose.
What happens to the profits the company makes?
All the profits made by a guaranteed company are reinvested in the company to achieve all its goals more effectively.
Limited guarantee companies get funds from investors, clients, and supporters.
Benefits of setting up a Company Limited By Guarantee (Ltd/Gte)
The key benefits of an Ltd/Gte Registration are listed below:
- Opening a Company Limited by guarantee Nigeria can be incredibly beneficial – particularly if your organisation is not-for-profit (such as a sports club or private members’ club).
- A guarantee company is a separate legal entity from its guarantor which makes the company liable for its own debts. Individual members are almost totally protected against liability.
- The liability of the members/ guarantors of a guarantee company is limited only to the extent of the guarantee provided by them, therefore, they cannot be held personally liable for the debts of the company.
- Entities that are limited by guarantee do not have shareholders or shares; instead, they are owned by one or more guarantors who agree in advance to pay a set amount of money towards any debts accrued by the firm.
- By registering a company limited by guarantee, you are essentially creating a separate legal entity that can enter into leases, hold property and even employ people in its own name.
- Can be invaluable for charitable organisations seeking to accrue funding, as most funding bodies will consider a company to have more stability and structure than standard voluntary organisations.
- Having a company with a limited status helps to create trust among potential customers or clients – its professional accreditation can go some way towards helping your company limited by guarantee achieve its goals and objectives.
- They can take or defend legal proceedings in their own name.
- The guarantee company does not have shares to give its members. This means all guarantors have equal rights to the company. Every member has control, and no one is above the other.
- The personal assets of the company’s guarantors are protected. Members will only be responsible for paying company debts up to the number of their guarantees.
- The company is generally regarded by funding bodies and public agencies as a more stable structure than a voluntary structure; this builds trust from investors and supporters.
Requirements to Establish a Limited by Guarantee Company
- The name of the Guarantee company – 2 names (A name availability check will be conducted at the CAC and when one of the 2 proposed names is available, the name will be reserved).
- The general nature of the business of the Guarantee company;
- The principal place of business of the Guarantee company;
- At least 1 director who is ordinarily resident in Nigeria
- At least 1 member
- Qualified Company Secretary
- Constitution (Memorandum & Articles of Association) setting out the objects and by-laws.
- Application to the Attorney General of the Federation for authorization to register the company within 30 days, the AG shall approve where there are no objections or where there is no reasonable cause to refuse the application.
- Where no decision is made within 30 days, we shall Place an advertisement in 3 daily National newspapers for 28days inviting the public to object if any.
Where the above requirements have been complied with, the CAC shall within 40 days of the submission of the application register the Guarantee company and issue a digital certificate of incorporation stating the name, date, and registration number of the Ltd/Gte.
If you are still not sure which one to pick for your business, feel free to reach out to us and our experts will guide you in making the right decision.
Company Limited By Guarantee (Ltd/Gte) Incorporation
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