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Guarantee company formation

If you want to proceed to register a guarantee company, check that you have all the required information and register now.

Companies limited by guarantee are widely used for charities, community projects, Community Interest Companies (CIC), social enterprises, clubs (including Community Amateur Sports Clubs (CASC), societies and other similar bodies. Most guarantee companies are not-for-profit companies, that is, they do not distribute their profits to their members but either retain them within the company or use them for some other purpose. We have many years' experience of forming such companies and this work is now handled by Community Companies, which for most charities and community enterprises will undertake the work at reduced rates. Most companieslimited by guarantee need their articles of association to be specially drafted, and this is the main specialised work to be undertaken.

Incorporation services can register a company limited by guarantee with our standar articles of association. There are two alternative sets of articles:

  • Company limited by guarantee that allows profits to be paid to its members and salaries and fees paid to its directors, and
  • Company limited by guarantee that prohibits the payment of profits to members, requires any surplus assets on winding up to be given to charity and prohibits the payment of salaries or fees to its directors.

If you need more information about this type of company, the following is a detailed guide. If you want to proceed to register a guarantee company, check that you have all the required information and register on line now.

 

Why use a company limited by guarantee?

The main reason for a charity, community project, etc., to be a company limited by guarantee is to protect the people running the company from personal liability for the company's debts, just as a business may be set up as a company limited by shares for the same reason. Sometimes funding bodies, such as local authorities, insist on an organisation being registered as a company limited by guarantee. A company limited by guarantee is appropriate if it is a not-for-profit company, as such a company has no shareholders and no mechanism for paying dividends.

Our specialists at Community Companies can provide more information on these areas.

The members of companies limited by guarantee have limited liability

If a charity, community project, club, etc. is not registered as a limited company, then the people running it (typically the management committee, etc.) can be made personally liable for its unpaid debts. This can be a real risk. Some charities, community groups, sports clubs, etc. can be substantial enterprises, with liabilities that cannot easily be turned off. They may have leasehold premises, employ people, have equipment on finance contracts, etc. If the income does not meet these outgoings, the organisation may become insolvent, and the people running it (though not usually the members at large who are not on the committee) can be made personally liable for the shortfall. This can happen because of unforeseen and unfortunate circumstances, such as the sudden withdrawal of financial support from a body such as the local authority.

With a limited company, on the other hand, the company itself is a separate legal entity and it, not the people who own or run it, is liable for its debts. In a company limited by shares, the shareholders' liability is limited to the amount the shareholder has agreed to pay for his or her shares. In a company limited by guarantee, the liability is limited to the amount of the guarantee set out in the company's articles, which is typically just £1.

In both a company limited by shares and one limited by guarantee, the people running the company (the directors) will only incur any personal liability for the company's debts if they have been guilty of some wrongdoing, such as wrongful or fraudulent trading. Click here for more information on directors' liabilities.

What is different about a guarantee company?

A company limited by guarantee is much like an ordinary private company limited by shares. It is registered at Companies House, must register its accounts and an annual return each year, has directors, etc. A major difference is that it does not have a share capital or any shareholders, but members who control it. This is explained more fully below.

Companies limited by guarantee have members, not shareholders

In a company limited by guarantee, there are no shareholders, but the company must have one or more members. Subject to any special provisions in the company's articles, the members will be entitled to attend general meetings and vote, and in most company's that means they can appoint and remove the directors, and have ultimate control over the company. Many clubs operate on this basis. The members meet at the Annual General Meeting and elect a committee to manage the club on their behalf, and subject to the rules in the club's constitution. If the club is a company, the same rules will apply and will be set out in the company's articles. By and large, the company law provisions relating to general meetings, resolutions, etc. in ordinary share companies apply to companies limited by guarantee.

Just as in a company limited by shares there may be different classes of shares, it is possible to have different classes of members in a guarantee company. There may be non-voting members, for example, or members who have restricted rights in some other way. In a sports club, for example, there may be junior members (those under a certain age) who cannot vote, or social members, who pay a lower subscription but cannot use the sports facilities.

Directors of guarantee companies

A company limited by guarantee, as a private company, must have at least one director. Most guarantee companies have several. The directors may be given some other title, such a committee, management committee, board of managers, trustees, governors, etc. Whatever title they may be given, if they are in day to day control of the company they are in law directors of that company. Their powers will depend on the terms of that particular company's articles, but typically they are given very wide powers of management. Just as in a company limited by shares, these powers are conferred on the directors collectively, when they are sitting as a board and passing resolutions for the management of the company. They may, of course, set up sub-committees, etc and delegate powers to them, and may give particular directors special responsibilities, such as treasurer, membership secretary, etc.

In some companies, some or even all the directors may be appointed by one or more outside bodies, such as charities or local authorities who are backing the project. Some directors may be elected by particular interest groups.

A company limited by guarantee oes not have a share capital

The fact that a company limited by guarantee cannot (now) have a share capital limits its fund-raising capacity, simply because it cannot issue shares to those who back it and join it. For this reason, some projects that are not essentially profit-motivated are set up as companies limited by shares. An alternative structure would be a Community Interest Company limited by shares.

Many companies limited by guarantee raise their funds by levying subscriptions and/or a joining fee. A guarantee company can also borrow money and may issue debentures or debenture (loan) stock.

As there are no shareholders, it is not possible to own a company limited by guarantee in the way that a company with a share capital is owned by its shareholders. The members of the guarantee company control it, in the same way as a club is controlled by its members, but they do not have any shares or other security in the company that they can sell to another.

'Not for profit' companies limited by guarantee
A company limited by guarantee is not prohibited from distributing its profits by the Companies Act or any other law, but it is commonplace for restrictions to be put on profit distribution in the company's articles. Such restrictions will usually apply both to profits while the company is running and to the distribution of assets (after paying creditors) when the company is wound up. In many cases, but by no means all, these restrictions are reinforced by a prohibition on any payment of salaries or fees to the directors.

Exemption from having 'Limited' at the end of the name
A not for profit company limited by guarantee can be exempted from having the word 'Limited' (or 'Ltd') at the end of its name if it is set up for certain objects. These are the promotion of commerce, art, science, education, religion, charity or any profession. Contact Community Companies for further details.

Charities
A charity need not be a company, but can be set up with a trust deed, when it will be an unincorporated association. In England and Wales, charities (other than very small ones) are registered with the Charity Commission, who have regulated powers over them. The equivalent body in Scotland is the Office of the Scottish Charity Regulator (OSCR) and in Northern Ireland the Charity Commission for Northern Ireland. If limited liability is sought, the body would have to be registered both as a charity and as a company limited by guarantee, and certain provisions (such as the restrictions on profit distribution mentioned above) must be included in the articles of association.

Our specialists at Community Companies can provide more information on these areas.

Community Interest Companies (CICs)
A CIC is one formed for the benefit of the community. A CIC can be registered as a company limited by guarantee or one limited by shares. Most CICs are companies limited by guarantee. The CIC limited by shares is useful where the company is being backed financially by one or more outside bodies or individuals who can invest in it by taking shares. There is, however, a statutory dividend cap, restricting the payment of profits out of the company.

The two main features are the asset lock and the Community Interest Statement and Report. Under the asset lock provisions, the assets and profits must be permanently retained within the CIC, and used solely for community benefit, or transferred to another organisation which itself has an asset lock, such as a charity or another CIC.With every application to form a CIC, a Community Interest Statement must be lodged. This must certify that the company is formed to serve the community rather than private profit motives and must describe the activities of the CIC. A CIC may be limited by shares or guarantee. They cannot be registered electronically as each company has to be vetted by the CIC Regulator. Community Companies have formed many CICs and can advise on them.More advice is available on the CIC Regulator's website.

Right to manage (RTM) companies
The Commonhold and Leasehold Reform Act 2002 provides a right for leaseholders to take over the landlord's management functions by transferring them to a special company set up for the purpose, the Right To Manage (RTM) company. The right was introduced to empower leaseholders, who generally hold the majority of value in the property, to take responsibility for the management of their block. It applies only to leaseholders of flats, not of houses. The process is relatively simple. The landlord's consent is not required, nor is any order of court. The right is exercised by the service of a formal notice on the landlord. After a set period of time, the management transfers to the right to manage company (the RTM company) which has been set up by the leaseholders. Once the right to manage has been acquired, the landlord is also entitled to membership of the company.

We cannot advise about putting the process into effect, a process usually undertaken by solicitors, but we can set up the RTM Company. There are special regulations in the RTM Companies (Model Articles) (England) Regulations 2009 as to the contents of the articles of association. The company can be registered electronically. Contact us for further details.

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