The differences between companies limited by shares and limited by guarantee

When setting up a company, it is important to ensure that the most appropriate legal structure is used, to help meet the objectives and needs of the business.  Most of our clients incorporating a company, set up a private company limited by shares. There are occasions however, when being limited by guarantee may be more suitable.  In this article we shall look at the limited by guarantee  structure and see if it is the most suitable for you. Learn more about services from our commercial law solicitors.

Topics to be answered in this article

Limited by shares vs limited by guarantee.

Most companies in the UK are registered (incorporated) as “limited by share”. This means they are owned by one or more shareholders, with the limited company itself being responsible for the debts of the business. Profits are usually distributed to the shareholders by means of dividends. This very common structure is ideal for companies that primarily exist to make a profit.

Limited by guarantee companies, on the other hand, do not have shares or shareholders, and instead are controlled by one or more guarantors (or members), who manage the day-to-day activities. This structure is ideally suited for social enterprises, such as a non-for-profit company or charity.

What does “limited by guarantee” mean?

Limited by guarantee is a type of company where members (guarantors) give a guarantee to pay a certain amount in the event of the company being wound up. A member’s liability is limited to the amount they have guaranteed. Usually this is a nominal amount, and often limited to £1.00.

How is limited by guarantee different from being limited by shares?

With companies limited by shares, there is a share capital (the value of the company), and those shares are held by the members. With companies limited by guarantee, members do not hold shares in the company and subsequently the company has no share capital.

One of the key differences is that members of a company limited by guarantee do not have to make any financial contribution to the company (unless the company ceases to operate as a going concern). With a company by shares, a shareholder will usually have to pay full market price for the shares they are buying.

A further difference and often the reason why most companies are set up as limited by shares, is that the shareholders have the right to share in the profits of the company, by way of receiving a dividend payment. With companies limited by guarantee, any profits stay in the company and are not paid to members.

Why incorporate as a company limited by guarantee?

Members not being able to take a profit from the company works well for non-profit organisations such as charities, clubs, and property management companies.  These organisations operate to benefit a particular group, or with a charitable purpose, and do not intend to distribute profits to members.

As is the case with companies limited by shares, the separate legal personality of a company limited by guarantee is often a key reason why any charities and clubs choose this structure, rather than remaining an unincorporated association with its members being at risk of claims. The separate legal personality means that the company can own assets and have its own liabilities, ensuring separation and clarity.

Companies which are limited by guarantee usually have a high degree of membership flexibility. Membership is not attached to shares, so the company does not need to be valued. Unless the articles of the company say otherwise, when the membership changes, it is usually simple to join or leave.

How to set up a company limited by guarantee

The process for incorporating a company limited by guarantee is almost identical to setting a company limited by shares. The differences are that the form IN01 must include a statement of guarantee instead of a statement of capital, and the pro forma memorandum of association for companies without a share capital should be used.

How can Goughs help?

Goughs have many years of experience in helping businesses to get started and run effectively and efficiently. If you think that a limited by guarantee structure might be the best for your needs, please do get in touch with our commercial law solicitors or pop in to one of our local offices.  We look forward to hearing from you.

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Author Bio

Jonathan Carter-Lewis

I was first attracted to a career in law when I did an internship for a large conglomerate working in their corporate & commercial team, in Hong Kong. That gave me my first taste of what a lawyer does. 

I enjoy problem solving and being thrown into something that isn’t straight-forward. Finding ways to make my clients’ lives easier, putting smiles on their faces, and building strong working relationships are just a few of the highlights of the legal profession.

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