Limited by Guarantee what are the rules

Henry Catchpole explains the rules governing companies limited by guarantee

The company limited by guarantee remains a popular form for many types of business, with prominent examples such as Oxfam, the Samaritans, the England and Wales Cricket Board and the PGA European Tour. With more than 10,000 new guarantee companies formed each year in the UK and over 130,000 currently active, most accountants will at some point be asked to form or support this type of company.

A guarantee company is often used for:

• Charities, where ‘profits’ are applied to charitable purposes.

• Clubs, societies and communal projects.

• Professional and trade associations.

• Residents’ property management companies.

Each of these types of organisation can exist for many years, so it’s no surprise that about half of companies limited by guarantee active today have existed for ten years or more. Standard companies limited by shares, on average, do not survive as long.

Why a company limited by guarantee?

Many clubs, societies and associations remain unincorporated. But unless it’s registered as a limited company, the people running the organisation may be personally liable for any unpaid debts. As well as limiting liability, incorporation confers a separate legal entity.

Status as a guarantee company can demonstrate a social commitment. They cannot raise money by issuing shares and most do not distribute their profits to members. This contrasts with companies limited by shares, whose shareholders are ultimately looking for profit via dividends and capital appreciation.  

Who controls a company limited by guarantee? New companies limited by guarantee do not have shares or shareholders. Instead, the company has guarantors – also called members. They agree, upon becoming members, to guarantee a fixed amount towards the company’s debts in the event of liquidation. This guarantee is usually £1.

Without shareholders, a company limited by guarantee is not really ‘owned’, but the members still ultimately control it. They usually have the right to vote on important matters affecting the company – typically at an annual general meeting (AGM). Usually, membership is not transferable, so it’s not like having a share you can pass on to someone else.

In some companies, there are different classes of member, such as voting and non-voting members. In a sports club, for example, there may be both adult and junior members. Alternatively, one class of members may just be able to use the sports facilities but not enjoy voting rights, perhaps therefore paying a lower subscription fee.

One of the decisions the voting members will make involves the appointment of directors to run the organisation on a day-to-day basis. Directors of a company limited by guarantee play much the same role as those of other companies, although they’re often given another title – the management committee, board of governors, trustees, managers or something similar.

Each company limited by guarantee must have at least one member and one director, although the same person can hold both roles. The details of initial directors and guarantors must be submitted to Companies House as part of the formation of the company and any changes to the directors must be notified. However, unlike in companies limited by shares, new members of a company limited by guarantee do not need to be reported. 

Company secretarial requirements

In other ways, the requirements of a company limited by guarantee are mostly the same as for other types of private limited company, including:

• They’re incorporated at and regulated by Companies House, subject to the Companies Act.

• They must comply with rules on company names. Usually, they must include the suffix ‘Limited’ or ‘Ltd’ at the end of their name, although there is an exemption available from this requirement if the company is established for certain purposes and does not distribute its profits to members.

• The company must have a registered office, the details of which are made available to the public.

• They need both a memorandum and articles of association. There are model articles available for companies limited by guarantee, although new guarantee companies sometimes include a tailored list of objects, defining what the company will do, within the articles. They’ll also often contain a specific clause restricting the payment of any profits to members, instead defining that surplus income is reinvested.

• They must file annual accounts.

• They must submit an annual confirmation statement and event-based filings to Companies House.

• They must set up and maintain a suite of statutory registers.

If the guarantee company is charitable, it will also be subject to charity law. Charitable companies limited by guarantee are regulated by the Charity Commission or, in Scotland, the OSCR.

• Henry Catchpole is CEO of Inform Direct. Call 0844 409 9494 or go to www.informdirect.co.uk

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