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Registering an organisation as a Company Limited by Guarantee

10th March 2015

Before registering an organisation as a Company Limited by Guarantee it’s important to understand its main advantages.

According to s.5 Companies Act 2006 a Company Limited by Guarantee cannot be formed with share capital.

Current rules state that all companies that retain the profit or use it for some special purposes rather than distribute it to the members of the company are eligible to be registered as Company Limited by Guarantee.

This rule usually applies for: Charities, Societies, Membership organisation, Community projects, Residential property management companies, Student’s Union, Clubs and other similar bodies.

The main reason for an organisation to adopt this model is to reduce the members’ personal liabilities in the event of insolvency (similar to directors in company limited by shares).

Normally in this situation members give a nominal guarantee (usually £1) to cover company’s liability.  They will be able are roughly equivalent to shareholders in a company limited by shares. This type of protection is only available if the Management Committee/Trustees/Board can demonstrate that it has acted with ‘due care and diligence’

As the company cannot distribute profits, this encourages member involvement and commitment to the entity’s objectives, rather than any profit. In addition, since the board is elected by the members, they have the right to remove them.

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Disadvantages

A company limited by guarantee cannot raise funds through equity finance (as it cannot issue shares). It is therefore limited to donations/grants, and loan finance.

In addition to this, the company is still subject to the same statutory filing requirements as a company limited by shares, so there will be no cost savings involved.

Summary

Both companies limited by guarantee and limited by shares are subject to the same statutory filing rules, and if they have a charitable status must be additionally registered with the Charities Commission.

They have different purposes (profit making vs. not for profit), however.

There are some differences in the preparation of accounts (labelling etc).

http://www.accountingweb.co.uk/article/companies-limited-guarantee-get-it-right/517844