Are you considering one of the several business structures available? Wondering what is a Company Limited by Guarantee? Such a company is very common among nonprofits, charities, clubs, and social enterprises. It gives organizations specific benefits that attract one to community, education, or charity. In this article, we explore the salient features of this type of company. Why this is the preferred choice of some organizations, and the process involved in the formation. For any business intent on having the structure realize the mission, keep reading for more of this powerful model.
What is a Company Limited by Guarantee?
This is a weird kind of legal form designed for non-profits. It includes charities, sports clubs, social enterprises, and community projects-and whose “ownership” isn’t by shareholders but by “members”. Unlike regular companies, CLG members issue no shares and draw no dividends. The members agree to commit a small sum—sometimes a pound or a dollar—toward any debt created if the company is liquidated.
This model turns out to be very attractive to those organizations established based on education, charity, and social cause. It usually safeguards assets, allowing members to pursue their mission goals while providing limited liability for their finances. One of the critical features about using a CLG structure is to form trust with donors. Funding sources involve a commitment to reinvest all resources toward achieving a social impact goal instead of pursuing personal gains.
Key Features of a Company Limited by Guarantee:
Understanding the key features of a Company Limited by Guarantee may help you understand whether your organization needs one. Here are some of the key features:
Limited Liability for Members:
Members are liable only for the value of the contribution that the member has promised to guarantee, which will usually be a small sum of money, like ÂŁ1 or $1.
No Share Capital:
There is no Share Capital of the CLG. Now, a private limited company bears share capital; however, there is nothing about the CLG in this regard. Instead of holding the equity stake of the firm, Members become guarantors rather.
Non-Profit Oriented:
Sometimes, the organization reinvests the excess amount generated from its operations into various activities instead of distributing it to the members. In such sectors, this will be apt for nongovernmental organizations or charities and most community-type firms.
Compliance Requirements:
CLGs are required to meet the various legal terms. This differs with the jurisdiction that the particular organization falls under, which primarily involves annual reporting and audits of accounts.
Mission-Based:
Organizations use this type of company whenever their mission is a primary concern and they do not consider profit distribution.
Such values make CLG suitable to social enterprise, schools charities, community groups, for which good will is better than profit generation.
How to Form a Limited by Guarantee Company?
It is not too difficult to set up a CLG, but it is uniquely different from the usual kind of business. Here is an overview of how you can set up a CLG:
Choose a Name:
- The name should describe what the organization does and should meet the local naming laws of the area.
Objectives and Memorandum of Association:
- Objectives must state it is a non-profit or charitable organization. Memorandum of Association: Must draft with an intention that is showing the members agreeing to add an amount on winding up of that particular company.
Draft Articles of Association:
- Articles detail how a specific company will manage its operations in a Company Limited by Guarantee (CLG), including specific information about how members will share profits (commonly reinvested into the business) and the governance structure. They also outline the roles, responsibilities, and accountabilities associated with the members themselves.
Appointing Directors and Members:
- These are primarily responsible for the running of the operations of the organization. In a CLG, members may also be directors but generally is better to have a board in place to provide oversight and strategic direction.
Register with the Relevant Authorities:
- You should send copies of your registration documents to the appropriate government department; for example, Companies House in the UK. In certain jurisdictions, the organization may need to provide additional documentation if it intends to apply for charitable status.
Obtain Necessary Licenses or Approvals:
- Organizations must obtain licenses or permissions if they will receive gifts or engage in other types of charitable activities.
Set Up Financial and Compliance Systems:
- Establish financial and compliance systems when forming the organization to meet reporting requirements.
A Company Limited by Guarantee is one that has post-incorporation obligations, which include annual reporting and meeting regulatory compliance standards.
Additional Points to Consider:
Other considerations in selecting a Company Limited by Guarantee:
- Asset Lock:
Virtually all jurisdictions include an asset lock in the Company Limited by Guarantee (CLG), which requires organizations to use their assets solely for their intended purpose and prohibits transferring assets to members.
- Tax Exemption:
A CLG is tax exempt based on the location and what you want to do with the company. However, this comes with conditions and requires an application for charitable status.
- No Profit Distribution:
Shareholding does not exist, which means that members cannot take profits. The organization focuses on achieving its goals rather than generating profit for individuals.
- Membership Changes:
Membership in a CLG can change over time, and also new members can join whereas existing members can leave that does not affect the whole structure of the organization.
- Governance Flexibility :
The CLG structure, it can be simple for small organizations or more sophisticated for larger organizations.
Consequently, the following factors make Companies Limited by Guarantee flexible for mission-driven organizations to focus on the social or charitable purpose.
FAQ: What is a Company Limited by Guarantee?
Well, in general, Company Limited by Guarantee is indeed a private entity. It runs more privately, tends not to have public shares, while the specifically targeted set is always mainly not-for-profit, toward a community or a cause.
No, a Company Limited by Guarantee cannot issue shares. It does not have shareholders but has members who are guarantors. That is to say, members agree to provide the nominal amount if the company winds up.
A company limited by guarantee can have a director removed through resolution in line with the objectives of the articles of association. Some jurisdictions also require legal notice and documentation.
A company limited by guarantee will normally have at least one or two directors, although the jurisdiction or the company’s bylaws might require more for charitable or larger companies.
A Company Limited by Guarantee typically has non-profit objectives that fall into charities, education, communities, or social welfare. The organization reinvests the surplus it generates and does not distribute it as profit shares among its members.
Conclusion
This model will suit those organizations that are of the view that social activities are more important than the quest for profit. It also provides protection by way of liability protection to its members, asset protection, and the profits re-invested in the cause for reinvestment. To finally decide which one of these models would better suit your organization’s purpose, understand the key features of a Company Limited by Guarantee as well as the process of formation.
If your objective for running an organization is in this form, then you can begin a Company Limited by Guarantee. The latter cannot be secured, making it a paradigm of sustainability that serves communities.
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