Companies Limited by Guarantee

• Company formation / Compliances
• ||
• August 27, 2021

Establishment limited by guarantee is also called a Guarantee Company. It is a company without any shareholders in a simpler term, but it is owned by members called guarantors. The members agree to pay a minimal amount when a company is about to wound up; any establishment limited by guarantee has a separate legal identity as its own. Such entities can carry out undertakings in the company’s name, such as employing human resources, borrowing credit, buying and selling property, petitioning for any lawsuit, etc. A Memorandum of association is unambiguously drafted for such types of enterprises.

The primary reason for a charity, community project, etc., to be structured as an enterprise limited by guarantee is to shield the people running the company from personal liability for the company’s debts, just as a business may be structured as a company limited by shares for the same reason.

Key points to the company limited by guarantee

• Borrowed for business by the name of the company
• Members of the company are only accountable to pay the guaranteed amount as stated in the company’s memorandum of association.
• Members are liable to pay the guaranteed amount only in the event of winding up of the company.

Company limited by guarantee having a share capital
The company will require initial capital or working funds from its members as it is not available as complete grants, subscriptions, fees, endowments, or other sources. But later, once the operation is started, the regular working funds can be received from the services rendered in prices, charges and subscriptions. Voting power in the establishment having share capital is resolute by the shareholding. 

Company limited by guarantee not having a share capital
Such type of guarantee companies does not obtain initial capital or working funds from its members. In this case, the companies raise the working funds through various sources like endowments, grants, subscriptions and fees etc. Non-profit organizations or charitable institutes, for example, are funded by public donations or government grants. The guarantee determines voting power in these companies.

Benefits of Company limited by guarantee

1. A company limited by a guarantee is a distinct legal entity from its owner or guarantor. As a result, the company is personally liable for its debts.

2. Guarantors are not personally held in chargeable for any of the company’s debts. Hence, their assets are protected. They are only accountable to pay the agreed amount as per their guarantee only in the event of the company’s insolvency.

3. As a guarantor, any person or corporate body can become a guarantor. All it requires is a single director and a single guarantor to get established. A single person can hold both positions, making it simple for anyone to start a business. Multiple directors and guarantors are permitted, however.

4. A company limited by guarantee is generally set up for non-profit purposes. Therefore, the profit generated by these companies is reinvested and used for promoting their non-profit activities.

5. Company limited by guarantee must include the suffix ‘limited’ in its name. This word instils trust in clients and investors.

An enterprise limited by a guarantee is much like a typical private company limited by shares. It must register its accounts and an annual return each year and has directors. A significant dissimilarity is that it does not have a share capital or any shareholders but have members who control the entire organization. 

At AJSH, we assist our clients in setting up their business in India and dealing with various corporate matters (Company incorporation, ROC Compliance, Company Winding up), bookkeeping, tax filings & assessments, payroll, auditing, trademark registration, business structuring etc. If you have any questions or wish to know more about companies limited by guarantee, kindly contact us.