What do clubs, student unions, property management companies, sports associations, workers’ co-operatives, social enterprises, NGOs, charities, some political parties, Network Rail, Nominet UK, the England and Wales Cricket Board, and the London Internet Exchange all have in common? They are all set up as private companies that are limited by guarantee.
Understanding Different Types of Companies in the UK
If you are in the process of registering a new company in the UK then it is essential to understand the different types of company and which of them best suits your needs. Under the Companies Act 2006 (CA 2006), there are four types of company:
- Companies limited by shares.
- Companies limited by guarantee.
- Companies with unlimited liability.
- Community interest companies.
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 private company limited by guarantee?
Typically, non-profit organisations like charities, clubs, and societies form this type of company. Unlike a private company limited by shares, a private company limited by guarantee does not use shares or have shareholders: Instead, it has “members”. To be precise, such a company must have at least one director and one member.
As per Section 3(3) of the Companies Act 2006, a company qualifies as “limited by guarantee” when its members have limited liability. Specifically, they agree to contribute a set amount to the company’s assets if it faces liquidation. In simpler terms, this structure limits the financial liability of members for the company’s debts in case of winding up. This limitation is outlined in the company’s “statement of guarantee”.
In a private company limited by guarantee, profits usually go back into the business. However, in certain cases that exclude charities, members may receive a share of these profits. This is only possible if the Articles of Association permit such a division.
A limited by guarantee company 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 while it continues to operate as a going concern. They will be liable, however, when the company is wound up.
- In contrast to a share company, a company limited by guarantee can remove the word “limited” from its name. However, this is only possible if specific criteria are met. Section 60 of CA 2006 states that this includes if the company is a charity.
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.
- Liability of management committee’s 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.
- The business can enter into various agreements, including service provision, goods and services purchasing, or leasing premises. It can also hire staff. In these cases, a member’s liability for these contracts remains strictly limited.
- Provides reassurance to other businesses and investors.
Companies limited by guarantee often appear when thereis no immediate need for capital to reach business objectives. Unlike share-based firms, where shareholders provide capital, these entities do not require such contributions during regular operations. Due to the limited access to working capital, this business structure is not the ideal choice for standard commercial entities. These commercial entities mainly focus on generating profit for their shareholders. This consideration is a major factor in deciding the company structure to choose.
It is crucial to note that a company limited by guarantee has lower administrative overheads compared to a company limited by shares. Nonetheless, there are still ongoing filing requirements with Companies House. These requirements must be both understood and met. These will depend on the size of the business (i.e. whether you qualify for small business or micro-entity accounts).
Suitability of a Private Company Limited by Guarantee for Different Types of Business
Most commonly, the following types of organisations use the private company limited by guarantee business structure:
- Clubs and societies – Not all clubs and societies opt for a company limited by guarantee. However, when they need to form a legal entity for contracts and wish to limit member liability, this option often makes sense.
- Trade and research associations – These organisations focus on serving their members rather than generating profit. Activities often include setting standards, lobbying government, and providing training.
- Community Interest Companies – Known as CICs, these companies work with social and community goals in mind. They operate in sectors like food, housing, and leisure services.
- Academies, schools and churches – Similar to clubs, not every academy, school, or church chooses to become a company limited by guarantee. But when they need to make external agreements, this structure allows them to do so.
- Charities – Regulated by Companies House and the Charity Commission, charities have Articles of Association. These documents specifically prohibit distributing profits to members.
- Property management companies – Often, a freeholder will use this business structure to create a company entity. The property title associates with this entity, and it manages the property. In such cases, each property owner may become a member. When selling a property, replacing a member becomes simple.
- Commonhold associations – When land ownership follows a commonhold model, a commonhold association usually forms. Typically, this is a company limited by guarantee.
What is a “statement of guarantee”?
When forming a private company limited by guarantee, its members, not called shareholders, make an agreement. This agreement is known as a “statement of guarantee.” In this statement, each member commits to contributing to the company’s assets if it faces liquidation. This applies if they are still a member or have ceased to be a member within the past year. They will only need to contribute, however, if:
- The company incurred debts and liabilities before they stopped being a member.
- The company owes costs and expenses for its winding-up process.
The completion of a statement of guarantee by all members is a statutory requirement under section 11 of CA 2006.
Forming a Private Company Limited by Guarantee
The process of forming a private company limited by guarantee is the same as setting up a private company limited by shares. This involves lodging a completed memorandum of association and application for registration (Form IN01) with Companies House with the appropriate fee.
The Memorandum of Association states that the members wish to form a new company and the amount of guarantee. The Articles of Association outline various aspects of the company’s operation. These include the reason for the company’s establishment and the timing of meetings. The document also details how members can join or leave the company. Additionally, it covers the process for appointing directors.
If required, applicants can use our standard articles (these are template Articles of Association containing a set of common/standard provisions) to form a company limited by guarantee where there are no special requirements. If special requirements exist, a commercial law solicitor will need to draft bespoke articles.
The CA 2006 does outline various procedures for re-registering a company as a different type. However, it does not include provisions for companies limited by guarantee. You can still make such a change by transferring assets to a new, shares-limited company. If considering this option, it is advisable to consult with a specialist in commercial law. They can competently guide you through this process.
As we have established in this guide, a company limited by guarantee differs from a company limited by shares. This company type is often the choice for non-profit organisations. These entities typically have no immediate capital needs and seek to limit the liability of their members. If you are uncertain whether this structure is suitable for your needs, it is advisable to speak to a commercial law solicitor. Similarly, consult a commercial law solicitor to create bespoke articles of association or any other legal matter.
Uniwide Formations specialises in the registration of limited companies and LLPs. As professional business service providers we offer a wide range of related services and can advise you on all aspects of the formation of a company limited by guarantee. To discuss any of the points raised in this article you are most welcome to call us.