The first decision before registering a new limited company should be whether the company will register as limited by shares or limited by guarantee. Most companies that look at a profit centre will opt for a limited by shares formation. For those looking to register a non-profit business or charitable organisation, the obvious choice should be a Guarantee Company otherwise known as a Limited by Guarantee Company.

What is a Guarantee Company

A Guarantee Company is principally meant for non-profit organisations that require corporate status. It is for this reason that limited by guarantee companies do not have any share capital or shareholders and require legal personality. Guarantee Companies instead have members who act as guarantors who agree to pay a set amount of money towards company debts or the event the company shuts down.

Any surplus income in Guarantee Companies is re-invested to help promote the non-profit objectives of the company, rather than being taken by the owners as personal income . If any money is taken by owners for personal income, the company will lose its charitable status and will be liable for taxes and other rules as prescribed.

Forming a Guarantee Company

Forming a Guarantee Company

The formation of a Guarantee Company is a fairly straightforward process and is relatively similar to formation of a traditional company. It must be registered at the Company House , must have a yearly audit with an annual return. This can be done online, by post, in-person or with the help of an agent. The actual process only takes about a day. Nevertheless, there are a few things that need to be kept in mind before going through with the process:

  • A Guarantee Company must have at least one Director who functions as a Manager and one Guarantor who functions as an owner.
  • The Director and Guarantor can be one person, without a limit for the number of Directors and Guarantors; however, the minimum age of this person should be 16 years old.
  • The company must provide address details of each person involved in the incorporation, with documentary proof of its validation.
  • The Guarantee Company must have a registered office address during the registration process. This includes a full postal address within the UK.
  • Guarantors are protected by limited liability. At the time of incorporation each member must guarantee a sum of money, this sum is also the limit of their liability. If the business cannot pay its debts, this sum of money must be paid.
  • Company name along with statement of Guarantee and Statement of Compliance.
  • Along with the statement of compliance the Guarantee Company also needs Standard Industrial Classification (SIC) codes. The SIC codes explicate the nature of the company’s activities.
  • Lastly, the company needs to have a Memorandum of Association and adopt Articles of Association. Both documents are mandatory at the time of company formation and outlines the guidelines the company has to follow along with the names of members and their agreement.

NOTE: Under Section 11 of the Companies Act 2006, Guarantors are required to complete a Statement of Guarantee. The signed Statement of Guarantee outlines the conditions and the consent by which the guarantors must pay their guarantees.

Why Form a Guarantee Company

As explained earlier, Guarantee Companies are primarily incorporated firms without any share capital. This form of business is ideal for charitable organisations that require corporate status. Without the input of share capital these companies usually rely on outside sources for funds. Welfare, social and non-profit organisations with small capital needs that can be met by membership subscription, donations or government grants are the most common users of this type of incorporation. Some characteristics of a Guarantee Company are:

  • They require the company to pursue charitable purposes and to apply its income in promoting those purposes.
  • They prohibit distribution to its members and the payment of fees to its directors
  • They require directors to approve all other payments made by the company to the directors.
  • The Limited or LTD status of the company can help the company achieve its objectives more successfully. Clients and investors who see this are reassured of its trust and reliability.
  • The Guarantee Company is a distinct legal entity, the sole responsibility of the company lies with the company itself.
  • The Guarantor’s personal finances are protected. The Guarantor will only be responsible for paying what was initially agreed upon by all members.

Limited Liability of Guarantors

The biggest attraction of Guarantee Companies is their limited liability. If the Guarantee Company is ever involved in a business transition that does not succed, Guarantors have legal protection to shield themselves and their personal finances from and liabilities that may result.If the Guarantee Company dissolves, then Guarantors will only be responsible for a nominal sum of money;which they had agreed upon at the time of incorporation of the company.In some cases, it can be as little as £1.

In addition to having limited liability, a Guarantee Company may also be limited by share capital. Because they do not have a share capital, they must be incorporated as public companies and must include the word ‘Limited’ or the abbreviation “Ltd” at the end of the company name.

In the case where there is any surplus income, this money is re-invested as per the original purpose the Guarantee Company was formed. These can be for the promotion of charity, education,science, commerce, art, religion, or any profession.This money cannot in any way be distributed to its members. If it does, it ceases to exist as a Guarantee Company and is Limited by Shares.

Its Decision Time

In some cases, deciding between a Guarantee Company and a company limited by shares can be a little complicated. The basic approach to deciding between the two is the planned distribution of profits.

Non-Profit Business = Guarantee Company

Profit-Making Business = Company Limited by Shares

Can the Two Be Interchangeable in The Future

So, you’ve formed your company, but later decide that you wanted to incorporate the other type. Is it possible to change your company now? Unfortunately, this change cannot be done after a Guarantee Company is incorporate. You will be required to incorporate an entirely new company, while dissolving your existing company. It is advisable to begin the process of incorporating a new company before your start with the dissolution process as the dissolution process can take up to 3 months.

Also keep in mind, you will be required to meet all filling and registration requirements under the Company House guidelines. If you wish to retain the name of the company, you will need to wait for the dissolution process to end before your can use the name. It is also possible to use a new name and register a new company and change the name once the dissolution process goes through. This is a bit tricky as it may require you to move quickly after the company closure process is initiated.

Good to Know Fact

One of the largest collapses in corporate history was a Guarantee Company – The National Safety Council of Australia Victoria Division. This company had 300 full-time employees and collapsed with losses estimated at $65,644,000. The collapse was triggered by the large-scale fraud of the company’s Chief Executive Officer (CEO). An action brought by a creditor against the directors resulted in one director being found personally liable to pay approximately $97 million and a significant judicial decision on the duties of the care owed by non-executive directors.

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