Orr Litchfield

Solicitors and Business Lawyers

Private Companies Limited by Guarantee

This page provides information about setting up, managing and closing private companies limited by guarantee and related matters. If you have any specific questions relating to private companies limited by guarantee, please contact us on +44 (0)20 3126 4520 or by email at enquiries@orrlitchfield.com

1. What is a private company limited by guarantee?

A private company limited by guarantee is a type of company, which does not have any shares or shareholders. Instead it has members who provide a guarantee in relation to the capital of the company.

Whilst the company is a going concern, the members do not contribute any capital to the company in their role as members. However, upon an insolvent winding up, the members may have to make a contribution to the liabilities of the company up to the maximum of a predetermined amount specified in the Articles of Association. This is usually a relatively small sum.

The majority of the features of a company limited by guarantee are the same as those for a private company limited by shares. It has independent legal capacity. Accordingly, it can enter into contracts in its own right, own property and other assets, and employ individuals.

2. Key features of a private company limited by guarantee?

(a) Independent legal capacity.

(b) No share capital.

(c) No liability for members to contribute capital while the company is a going concern.

(d) Upon an insolvent winding up, the member’s liability is limited to a predetermined sum.

(e) The company may be able to exclude the word ‘limited’ from its name. 

3. What are companies limited by guarantee used for?

Companies limited by guarantee are often used by charities, other non-profit organisations (such as sports clubs, workers co-operatives, and membership organisations), property management companies, public sector bodies (set up by central or local government to manage all or part of their functions), trade associations and research bodies.

They are commonly used where the organisation:

(a) does not need a significant amount of capital,

(b) does not intend to distribute the profits but will instead re-invest them in the organisation to promote the organisation’s objectives, and

(c) wishes to have the benefit of limited financial liability (for example, when entering into contracts) and a clear structure for running and managing the organisation.

A company limited by guarantee may be set up to run a profit-making business in which the guarantors will keep the profits. However, the structure of a company limited by shares is likely to be more suitable for this purpose as it is more flexible from a financial perspective (for example, with regards to raising finance) and will be more familiar to third parties (for example,  banks).

4. Who can own a private company limited by guarantee?

A private company limited by guarantee is owned by its members. Any legal person (for example, individuals, companies or LLPs) may be a member. Where the Articles of Association permit, a minor may be a member.

A company limited by guarantee must have at least one member.

5. Who are the Members of private companies limited by guarantee?

The first members of a company limited by guarantee are the legal persons who subscribe to the company’s Memorandum of Association when it is incorporated.

The Articles of Association will contain provisions relating to membership including any qualifications for membership, the application process and any procedures relating to the termination of membership.

Part 3 (Members) of the current model Articles of Association for a company limited by guarantee (prescribed by The Companies (Model Articles) Regulations 2008) contains various provisions relating to membership. Paragraphs 21 and 22 of those Articles of Association relate to becoming and ceasing to be a member respectively.

Paragraph 21 of the model Articles of Association provides that each new member must complete a membership application form, which must be approved by the directors, before the relevant person becomes a member.

Paragraph 22 of the model Articles of Association contains provisions relating to the termination of membership. It simply provides that a member may withdraw from membership on 7 days’ written notice to the company and that a person’s membership terminates when the member (in the case of an individual) dies or (in the case of other legal persons) ceases to exist. Companies commonly supplement these provisions by adding a series of additional automatic membership termination events (for example, where a member has not paid membership fees, becomes bankrupt or enters into insolvency proceedings) and a limited power to expel members.

Any new members of a company limited by guarantee must be entered in the register of members kept by the company. Similarly, their names should be removed when they cease to be members.

Whilst it is not referred to in the model Articles of Association, members are often required to pay an annual membership fee in order to maintain their membership. Such fees are commonly used as a way of providing a small amount of working capital for the company.

There is no requirement for companies to issue or members to hold membership certificates as evidence of their membership. The model Articles of Association provide that membership is not transferable.

A company limited by guarantee may have different classes of members with different rights. It is common for the Articles of Association to be supplemented by additional by-laws containing various rules, rights and duties relating to members.

6. Who can be directors of a private company limited by guarantee?

A company limited by guarantee must have at least one director.

The first directors of a company limited by guarantee are those specified in the company formation documents when it is incorporated.

The Articles of Association will contain provisions relating to directors including any rules relating to such matters as their appointment, termination and payment.

Part 2 (Directors) of the current model Articles of Association for a company limited by guarantee contains various provisions relating to directors. Paragraphs 17 and 18 of those Articles of Association relate to the appointment and termination of directors.

7. Does a private company limited by guarantee require a company secretary?

No. However, they may choose to do so. The current model Articles of Association for a company limited by guarantee refer to a company secretary in two places – Paragraph 9 (Calling a directors’ meeting) and paragraph 35 (Company seals) but, in each case, it uses the words “…the company secretary (if any)…”.

8. How do you form a private company limited by guarantee?

Companies limited by guarantee are set up in a similar way to private companies limited by shares. Any person wishing to establish a company must file the following documents with the Registrar of Companies in the UK and pay an incorporation fee:

(a) An Application form to register a company;

(b) The Memorandum of Association of the Company; and

(c) The Articles of Association of the Company.

9. What information is required to prepare an application form to register a company limited by guarantee?

In order to complete an Application form to register a company limited by guarantee, the applicant (or its agent) will require the following information:

(a) Directors - The names and addresses of the director(s). The application must include their countries of residence, nationality, date of birth, addresses and occupations.

(b) Guarantors - The names and addresses of guarantor(s).

(c) Company secretary - The names and addresses of any company secretary.

(d) People with Significant Control over the company (PSCs) - The names and addresses of any PSCs and information regarding the nature and extent of their control.

(e) Company name - The name must not be the same as or similar to the name of a company already on the Companies Register. In addition, it should not be misleading or offensive.

(f) Registered office – The formal registered office address of the company for correspondence and legal documents.

(g) Statement of guarantee - The amount of the guarantee given by each member of the company.

(h) Standard Industrial Classification ‘SIC’ code - These codes explain the nature of the company’s trading activities. A company can have up to 4 SIC codes.

While the majority of this information is normally on the public record, it is possible to elect to keep personal addresses private and include a service address instead.

10. What is included in the Memorandum of Association of a company limited by guarantee?

All limited companies must have a Memorandum of Association.

The Memorandum of Association of a company limited by guarantee is now a very simple document. In relation to new companies, it now usually only states the name of the company, the name of the subscriber to the memorandum of association (or, where there is more than one, each of them), a statement that they agree to become a member of the company and the date.

In older companies, the Memorandum of Association is likely to be longer. In particular, it is likely to contain a series of provisions setting out the objects of the company and related powers to manage it and short statements as to the capital of the company and liability of its members. Equivalent provisions are now contained in the Articles of Association of new companies.

11. What is included in the Articles of Association of a company limited by guarantee?

All limited companies must have Articles of Association.

The Articles of Association of a company limited by guarantee contain a range of provisions relating to the running and management of the company. This may include, provisions relating to directors’ powers and responsibilities, decision-making by directors, the appointment of directors, becoming and ceasing to be a member, the organisation of general meetings, voting at general meetings, administrative arrangements, and directors’ indemnity and insurance.

Unless bespoke Articles of Association are created and maintained for a company limited by guarantee then the Model Articles of a company limited by guarantee created pursuant to the Companies Act 2006 and the Companies (Model Articles) Regulations 2008 apply by default. They will also apply to the extent that they are not excluded.

12. Model company formation documents for private companies limited by guarantee

It is possible to use model Memorandum and Articles of Association when setting up a company limited by guarantee. These are very simple documents. The model Articles of Association, in particular, may not be appropriate for certain companies.

13. Written resolutions

Ss299-300 of the Companies Act 2006 contain a statutory procedure for written resolutions of private companies (whether limited by guarantee or limited by shares). This procedure cannot be overridden by the company’s Articles of Association.

The statutory procedure for written resolutions cannot be used in relation to (a) a resolution under section 168 of the Companies Act 2006 removing a director before the expiration of his period of office, or (b) a resolution under section 510 removing an auditor before the expiration of his term of office.

14. Private companies limited by guarantee with share capital

Until 22nd December 1980, it was possible to incorporate or re-register an existing company as a private company limited by guarantee with a share capital. Since that date, it has not been possible to do so.

S5(1) Companies Act 2006 provides that “A company cannot be formed as, or become, a company limited by guarantee with a share capital.” Furthermore, s5(3) Companies Act 2006 provides that “Any provision in the constitution of a company limited by guarantee that purports to divide the company's undertaking into shares or interests is a provision for a share capital. This applies whether or not the nominal value or number of the shares or interests is specified by the provision.”

Any private companies limited by guarantee with a share capital that still exist will have a specified amount of nominal capital, which will be divided into shares of a fixed amount.

15. Converting to a company limited by shares

There is no statutory procedure for re-registering a company limited by guarantee as a company limited by shares. However, it is possible to achieve the same effect by:

(a) Changing the name of the existing company limited by guarantee so that it may be used by the new company limited by shares;

(b) Registering the new company as a company limited by shares; and

(c) The two companies entering into a business sale agreement or asset sale agreement (as the case may be) to transfer the business and/or assets from the company limited by guarantee to the new company limited by shares some of the assets

It will also be necessary to deal with a number of administrative, financial and practical issues as the new company will be a separate legal entity (for example, tax registrations and bank accounts).

16. Exemption from requirement to use “limited” under Section 60 Companies Act 2006

S59 Companies Act 2006 provides that “the name of a limited company that is a private company must end with “limited” or “ltd” (or welsh equivalents). However, S60 Companies Act 2006 sets out some exceptions to this rule so that certain types of companies can apply to dispense with the word ‘limited’. In so far as this provision relates to companies limited by guarantee, there are 2 categories:

(a) charities, and

(b) companies set up prior to the Companies Act 2006 coming into force, which were exempt by virtue of section 30 of the Companies Act 1985 and had a name that did not include the word “limited” or any of the permitted alternatives. These companies will remain exempt provided that they continue to meet 2 conditions and do not change their name. The conditions are (i)  the objects of the company are the promotion of commerce, art, science, education, religion, charity or any profession, and anything incidental or conducive to any of those objects, and (ii) that the company's articles meet various financial criteria.

17. Winding up a private company limited by guarantee

It may be necessary to wind up a private company limited by guarantee because it is no longer required even though it is solvent or because it has become insolvent. In each case, the procedure for winding up a private company limited by guarantee is very similar to that for a private company limited by shares.

Unless specified otherwise in the Articles of Association, a resolution to wind up a private company limited by guarantee will require a special resolution (75% of the votes of the members in attendance at the relevant meeting). Procedural rules relating to, among other matters, notice and holding of meetings must be followed. The quorum for general meetings is 2 members (unless the Articles of Association specify otherwise). However, where the company only has one member, the quorum will be one.

18. What are the differences between companies limited by guarantee and companies limited by shares?

 

Company limited by guarantee

Company limited by shares

(a) Are members liable for the company’s debts on a winding up?

Yes. Liability is limited to the amount of the relevant member’s guarantee

Yes. Liability is limited  to the total outstanding nominal value of the relevant shareholder’s shares

(b) Do members have to contribute to the capital of the company when it is solvent?

No

Yes. However, depending on the Articles of Association, these may be fully, partly or nil paid

(c) Are members’ contributions an asset of the company?

No. There are no member’s capital contributions unless and until insolvent winding-up

Yes. They form part of the working capital of the company

(d) Can it dispense with the word ‘limited’ from its company name?

Yes (subject to certain conditions)

No (except in very limited circumstances)

(e) Can membership of the company be offered for sale to the public?

No

Yes, but only where it is a public company

(f) What are the main uses for the company?

Charities and other not for profit organisations

Trading organisations

 

19. What are the advantages and disadvantages of companies limited by guarantee?

The main advantages of a company limited by guarantee are (a) independent legal personality (so that it is responsible for its debts and liabilities and the liability of members is limited save in certain cases, such as fraud), (b) the enhanced level of credibility implied by limited company status, and (c) the stability of a clear set of statutory and constitutional rules which may assist the company to achieve the company’s objectives.

The disadvantages of being a company limited by guarantee include (a) the fact that details of the members, directors, constitutional documents and accounts become part of public record, (b) the increased setting up and running costs arising from statutory compliance, increased administration and ongoing filing requirements at Companies House, and (c) the difficulty of keeping track of members who relocate or cannot be contacted for other reasons.

20. Charities as companies limited by guarantee

Charities are commonly set up as companies limited by guarantee. These companies must also be registered with the Charity Commission. There are a number of additional requirements relating to such companies, which are beyond the scope of this page.

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full Legal Notices on our website or contact us for further infromation.

This page reflects our view of the law at the date on which it was created or last updated. Whilst we aim to keep this information up to date, we do not do so on a regular basis.

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