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Company Limited By Guarantee | Definition, Importance

A company limited by guarantee is a type of corporation used primarily for nonprofit organizations that require legal personality. It is an alternative type...

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Overview: Company Limited By Guarantee

company limited by guarantee

A company limited by guarantee is a type of corporation used primarily for nonprofit organizations that require legal personality. It is an alternative type of corporation to the more usual ‘share capital’ corporation.

The members or guarantors give up a certain sum or investments at the time of incorporation of such companies or later on through subscriptions. Apart from this, they do not have any liability in the company (i.e., they are not shareholders in common sense). The amount the guarantors undertake to contribute is known as the “guarantee sum”, and is usually a nominal amount such as £1 or £10. The members are not liable for any losses sustained by the company, except to the extent of unpaid contributions towards the guarantee sum if this has not been paid.

In practice, it will normally be difficult for a company limited by guarantee to make a profit, at least in its early years, because it will not have access to capital in the form of share capital. However, if a company limited by guarantee makes any profit it has the right to distribute such profits to the members if the AOA allows so.

If you wish to set up a company limited by guarantee with charitable status please read further.

Importance of Companies Limited By Guarantee

A company limited by guarantee has been primarily used for not-for-profit organizations only or clubs. Such companies do not have any shareholders instead have members to act upon.

The members give up a certain amount at the time of winding up of the company and has no such liability to pay in the event of the company. However, if the article of the association says so, then the companies can share the profits as well but this is not the major goal for such companies.

A company limited by guarantee is commonly used where the company’s objects are not to make a profit and are instead aimed at benefiting the community through some other activity (e.g., providing housing). This form of company is usually used when setting up a club or charity; however, there are many different classes and types of companies.

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Registration Of Company Limited By Guarantee

A limited company is registered at Companies House and has a separate legal identity. As a result, the people who run it (usually called directors) do not have any personal liability for its debts. That is to say, if it goes bust and cannot pay its creditors, those creditors will not then be able to go after the directors personally to make good the shortfall. This is the big advantage of a limited company over an unincorporated organization such as an association or trust.

That is why it is mandatory for a company limited by guarantee to register itself as a limited company to limit the liability of its members in case something goes wrong. However, if the wrong circumstance is because of the ill acts of members then members are personally liable for it, such as any other company.

Features of Company Limited By Guarantee

1. It has members and not shareholders-

In the case of a company limited by guarantee, there are no shareholders but members as they contribute only at the time of winding up of the company. But just like shareholders, members are supposed to attend meetings, take up major decisions, and vote accordingly.

Companies limited by guarantee are usually not-for-profit companies and thus members have to be available, take the general meetings, and decide on the important matters related to the club or organization.

Also, just like other companies have different classes of shareholders, companies limited by guarantees can have different slabs of members. Some may be voting while others may not.

2. Number of Directors-

The companies limited by guarantee must have at least one director directing and supervising the club and its members. The directors may even be called a committee, management committee, trustees, and many more.

But, whatever their name is they will still have to manage the affairs of the organization and if any day-to-day activities.

3. Zero share capital-

The company limited by guarantee is a hybrid form suitable for both non-profit organizations and businesses. The members are thus not general shareholders but guarantors, who accept liability in the event that the company is wound up with debts outstanding.

The most common arrangement is to require each member to guarantee a nominal amount (usually a small sum like £1) upon winding up but without any right to participate in the profits of the company (which would make it a profit-sharing guarantee company). This type of limited liability is often used by clubs, associations, and sporting bodies (such as cricket clubs), as well as charities.

Because a company limited by guarantee can’t have a share capital, it can’t offer shares to those who sponsor it and join it, its fund-raising capacity is limited. As a result, some projects that are not primarily profit-driven are established.

      4. Not-for-profit-

A company limited by guarantee cannot share its profits among its members the sole reason being it might be used for not-for-profit organizations.

The main reason for limiting profit distribution is that it prevents the members of a company from benefiting directly from its activities, at least until its debts have been paid in full. This is important where there are third parties who may have a claim against the company, such as creditors who have supplied goods or services to it.

 As long as they remain unpaid, they would be in a much worse position than members if the latter were allowed to benefit from its activities. The principle underlying this is that members should not benefit at the expense of creditors; rather, creditors should be paid first in priority to members.

Do such companies have to put Limited at their end?

A not-for-profit company limited by guarantee that has ‘objects’ with one or more of the purposes listed above can apply to be exempted from using the word ‘Limited’ or ‘Ltd’ behind its name, however, there are some exceptions to that,

it is incorporated for the sole purpose of promotion of commerce, art, science-religion, charity, or any such non-profitable profession.

its memorandum does not contain a statement that the liability of its members is limited by the amount they have undertaken to contribute to its assets if it is wound up.

Memorandum of Association

As per the Companies Act, 2013, companies limited by guarantee are required to prepare their memorandum of association as per table B in case of companies limited by guarantee having share capital and table c for companies limited by guarantee but without share capital.

Articles of Association

The articles of association of the company should be in the form provided in Table G for companies limited by guarantee with share capital and Table H  for companies limited by guarantee without share capital, according to Section 2 (5) of the Companies Act, 2013.

Key pointers

  • Members will be protected from being held personally accountable for money borrowed in the company’s name for commercial purposes.
  • Members of the company are just obliged to pay the guaranteed sum specified in the firm’s memorandum of association.
  • Members are only obligated to pay when the firm is wound up.

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Conclusion

Foundations, groups, athletic societies, subscription organizations, Non-profits, and other voluntary organizations frequently use warranty corporations. They are primarily founded to provide essential facilities without any financial gain in mind.

We hope you have enjoyed reading about Company Limited by Guarantee. If you have any further questions or concerns, please contact us anytime. Thank you for reading and we hope that this article has been able to provide you with the knowledge you need to create a successful company!

FAQ’s

Not-for-profit organizations or clubs are the ones that go with their liabilities being limited by guarantee. They do so because of the fact that they do not wish to share their profits and want to use them for the betterment of society.

These companies do not have shareholders but members as these members invest in the company and do not expect profits in return.

No, such companies are exempted from putting limited at their end.

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