If you’re a business owner in the UK, then it’s a good idea to have an understanding of the different company options available. In this blog, we’re answering the question, what is a private company limited by guarantee?
What is a limited company?
One of the most common ways to set up a company is through a limited company. When you begin this process, you will find that you are offered two further options: limited by shares or limited by guarantee. The most suitable option for you depends on the type of business you are founding.
Having a limited company means that there is a separation between the director and the company. The company is recognised as a separate legal entity from its directors, which means that directors are not usually personally responsible for the company’s debts. However, there are some instances where a director may be held personally liable. If you want to know more about limited companies, then you should check out our blog on limited companies in the UK.
You should seek professional advice if you aren’t sure which type of limited company is right for you.
What is a private company limited by guarantee?
The private company limited by guarantee structure is mainly used by not-for-profit organisations, such as charities, sports organisations, membership organisations and community projects. This type of company is required to have its own legal standing and identity.
There aren’t too many differences between a company limited by guarantee and a company limited by shares. However, a company by guarantee does not have its own shareholders. Instead, it has guarantors. Some organisations may be required to have multiple guarantors. These companies also do not have any share capital invested in them.
These companies are still their own legal entity, which means that each member’s personal finances remain protected and the company remains responsible for its own debts. The company must file accounts and pay tax in the same way that others do.
Companies that operate as charities may be subject to additional regulations under the Charity Commission.
What is a company limited by shares?
This is the most common option when setting up a limited company. This structure requires company shares to be distributed among shareholders. It’s very important that you consider these shares carefully, as they can affect dividends and voting rights within the company.
Other company structures include sole traders, partnerships, and community interest companies (CICs).
What are the key features of a guarantee company?
- There’s no share capital in the company
- Limited liability status
- Non-profit orientation – profits are usually reinvested rather than distributed
- Directors and members have different roles – there must be at least one guarantor and at least one director registered with Companies House.
How does limited liability work in a company limited by guarantee?
When a company is set up in this way, it must have guarantors. Each guarantor or member has liability that is limited to their specified guarantee. This is usually a very small sum, such as £1.
This guarantee means that if the company enters financial difficulties, the members have agreed to pay a fixed sum towards the debt. As we mentioned above, it’s not uncommon for this to be as little as £1.
What are the advantages of being limited by guarantee?
There are many advantages to using this structure if it is appropriate for your business.
Limited liability status
Having a limited liability company is a great idea for many business directors. It means that your personal assets are usually protected, provided that you act responsibly as a director and do not sign any personal guarantees. It also means that if the company does become insolvent, the members will usually only be required to pay a small fee, which they can control.
Separate legal entity
These companies are separate entities from their members or guarantors. This means these companies are free to enter their own contracts and own their own property and stock.
Build trust & professional credibility
Many company stakeholders view the limited liability status in a positive way, as it is professional and more stable than some other company structures. For non-profit organisations, building community trust is vital.
Simple to manage
Companies that are limited in this way are often easy to manage, as there is no requirement to deal with share capital. These companies must share annual accounts and pay corporation tax.
What are the disadvantages of being limited by guarantee?
Limited ability to raise investment through company shares
When a company uses this structure, members are unable to receive any dividends from the company’s capital. Due to having no shares, the company will not be able to raise share capital.
However, it’s worth noting that these companies can raise investment in other ways, as they are usually non-profit organisations.
Administrative and regulatory requirements
Companies limited by guarantee often have to deal with additional administrative tasks, which can be time-consuming. They will need to follow compliance rules and ensure they meet all regulations for admin and filing.
What happens when a company limited by guarantee becomes insolvent?
When a company limited by guarantee becomes insolvent, the risks are similar to those that a company by shares might face.
Many of these companies rely on memberships and sponsorships; therefore, if one of these stops, they may experience financial difficulties.
When these companies go into liquidation, the options are the same. They can use a creditor’s voluntary liquidation or a member’s voluntary liquidation. If they do not deal with their financial issues promptly, they may end up facing compulsory liquidation, which means you will lose significant control over the process. Company members of businesses limited by guarantee may also face personal liability if wrongdoing is found.
All of these liquidation procedures require the appointment of a licensed insolvency practitioner who will be responsible for closing the company and getting it removed from the Companies House register. Make sure you get all liquidation costs in writing before you choose the liquidator for your company, which is limited by guarantee.
We hope this blog has been helpful regarding private companies limited by guarantee. Please contact us if you are concerned about your company and it becoming insolvent. It’s crucial that you seek personalised advice, and we can help you achieve the best possible outcome.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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