Companies who adopt a Limited by Guarantee (LBG) structure are charities, social enterprises, community projects, clubs and other such non-profit organisations. The structure of the company is designed to reinvest all of their business profits back in the company. Therefore, back into the social enterprise projects, the company aims to support and develop.
The first step on the ladder to launching a new business is deciding which legal structure you wish to adopt. There are several different types of legal structures but many startups opt for a structure that offers its members limited liability.
The next question then, is whether to register as a limited by shares (Ltd) or limited by guarantee (LBG) company. The key difference being that one supports a model of personal benefit, while the other supports public benefit.
So in easy terms: profit = shares, non-profit = guarantee.
What Does it Mean by Company Limited by Guarantee?
A company limited by guarantee differs from a limited by shares structure in that it doesn’t have shareholders, or share capital. Instead, it is made up of members who each act as guarantors. Depending on the organisation, guarantors may also be referred to as “members”, “trustees”, “governors” or “committee members”.
Guarantors have a number of key duties within the business, including:
- Forming the company
- Agreeing the goals and objectives of the business
- Appointing or removing Directors – whose role is to handle the day-to-day running of the company (this can be the guarantor themselves)
- Agreeing the remit of the Directors powers
Each guarantor agrees to contribute a, typically very small (as little as £1), amount in the event that the company is wound up but they are protected from the significantly larger impact of personal liability.
Companies operating under an LBG structure set themselves as an entirely separate legal entity from their members. This means that all property and assets are held in the company’s name and it is able to enter into contracts and employ staff. The company is therefore responsible for its own debts and its members don’t take the fall if the business fails.
LBG organisations raise their funds in a different way to limited by share businesses, because they don’t have share capital and, therefore, can’t raise money by issuing shares to equity subscribers.
Instead, they might seek capital by using donations, funding, i.e. government grants, or borrowing. Some membership organisations operating as a company limited by guarantee also choose to impose subscription fees, which help to cover some of the overheads of running the business.
Why do certain businesses opt to be limited by guarantee?
It really comes down to risk.
The difference between companies which use a LBG structure and those which are limited by shares is that, should the company go into liquidation, shareholders operating within the latter structure might be required to pay all amounts relating to the number of shares that they hold within the business.
For example, if they own 100 shares at £2 each, they would be liable for £200 worth of repayments whereas, as we’ve mentioned previously, the members of a LBG company would be responsible only for their pre-pledged sum, e.g £1.
This is particularly relevant when we remember that the structure does not pay dividends back to its members.
How do you form a limited by guarantee company?
It’s pretty straightforward actually. In order to qualify for limited by guarantee status, you need to tick the following boxes;
- You must be registered with Companies House, the Registrar of Companies in the UK
- You must have at least one director and one guarantor. A guarantor can play both roles, or you can choose to have several directors and guarantors
- Required information about all directors and guarantors must be made available, on public record
- During the company formation process, you must provide details of a registered office address. This official company address must then be displayed on public record. It must be a full postal address in the country where your company is registered (ie not a PO box)
- You must complete a Memorandum of Association and adopt Articles of Association during the setup process
Should you decide that a limited by guarantee structure is the right one for your business, we can help get you started with our LBG Package.
How Does a Company Limited By Guarantee Work?
- Ideal for non-profit organisations like charities, sports associations, social clubs, co-operatives and membership organisations. Can also be used by commercial businesses but a limited by shares structure is better.
- As a Limited by guarantee organisations you are required to incorporate. YOur company will usually carry the “Ltd” status. There can be exemptions to the “Ltd” title however, if your company meets the following criteria;
- The company is a private company limited by guarantee.
- The company’s purpose is the promotion (or regulation) of charity, art, science, education, religion. This is not an exhaustive list.
- The Memorandum and Articles of Association must outline the following:
- That any profits are placed back into the company’s purpose – i.e. its charitable cause and prohibit the payment of capital or benefits to members.
- Requires each member to contribute their pre-agreed sum to any payment resulting from insolvency.
- State that in the event of the business winding-up, any remaining assets will be transferred to another body with a similar purpose and not to the members.
- As a Company limited by guarantee you will be required to submit accounts and an Annual Confirmation Statement at Companies House, just like a company limited by shares.