What is a Private Company Limited by Guarantee?

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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.

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:

In this guide we will focus on the purpose of a private company limited by guarantee, the types of business 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?

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 or have shareholders: Instead it has “members”. Strictly speaking, a company that is limited by guarantee will have at least one director and one member.

According to section 3(3) of the CA 2006, 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.
  • Unlike with a share company, the word “limited” can be removed from the name of a company that is limited by guarantee if certain 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.
  • 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 fulfil 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.

It is also important to remember that although the administrative overheads of a company limited by guarantee are less than those for a company limited by shares, there are still ongoing Companies House filing requirements that must be understood and met. These will depend on the size of the business (i.e. whether you qualify for small business or micro-entity accounts).

For what types of business is a private company limited by guarantee suitable?

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 government, or providing training) rather than being a profit-generating business.
  • 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 are regulated by Companies House and the Charity Commission and will have Articles of Association that specifically prohibit the provision of profits to members.
  • 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.

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 they stopped being a member.
  • There are costs and expenses that are owed for covering the process of winding up the company.

The completion of a statement of guarantee by all members is a statutory requirement under section 11 of CA 2006.

How is a private company limited by guarantee formed?

A private company limited by guarantee is formed using the same method 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 contain details of the running of the company, including why the company has been established, when meetings will occur, how members can join and leave and the appointing of 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 there are special requirements then bespoke articles will need to be drafted by a commercial law Solicitor.

Can a company limited by guarantee be changed to a company limited by shares?

The CA 2006 provides several re-registration procedures for changing one type of company into a different type, but companies limited by guarantee are not included. Such a change can still be made, however, by transferring the assets to a new company that is instead limited by shares. If you are considering this option then speak to a specialist in commercial law who can complete this process for you.

In summary

As we have established in this guide, a company limited by guarantee differs from a company limited by shares. A company limited by guarantee is typically set up for non-profit entities that have no capital requirement while the business is a going concern and there is a need to limit the liability of members. If you are unsure whether this is the right company type for your requirements then speak to a commercial law Solicitor before you proceed. Likewise, if you need help with the company formation process, drafting bespoke articles of association, or with any other matter, then a commercial law Solicitor can provide this for you.

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.

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