Company limited by guarantee vs company limited by shares: Coddan has a great deal of experience in helping clients to register both companies limited by guarantee and companies limited by shares. Both types of companies registration have distinct advantages as well as distinct roles within the economy, and choosing the right company type is a crucial first step for would-be members. It is possible to compare and contrast the two company types on three basic levels – function, structure and capital raising abilities.
Firstly looking at the function of the two company types, a company limited by guarantee is designed with the 'third sector' in mind. The differentiating function of a limited by guarantee company is that the personal liability to which members are exposed in the event of the company defaulting on its debts is highly limited - often at £1. This means that members can concentrate on their charitable, social or other aims.
Charitable companies, societies, community initiatives, sporting organisations and associations seeking to set up a guarantee company generally register as limited by a guarantee, agreed and stipulated at the time of the company limited by guarantee being registered. The broad term for companies of this sort is 'not for profit', meaning that any profits made by the organisation in question are retained within that organisation rather than distributed to its constituent members.
On the other end of the spectrum, companies limited by shares are the bread and butter of the private, profit-making side of an economy. Whereas the former arrangement limits the personal liability of its members to a guarantee, contrasting companies limited by shares expose their members to far greater liabilities. For general members, of which there is generally only one, this liability is not limited. For limited members, liability is limited at the value they paid for their shares in the company.
Structurally, the two types of company are quite different. A company limited by guarantee may take the form of an association, subscription-based membership organisation or other social group. On a business incorporation, the company will have a unique and apposite set of articles of association written, preferably by a guarantee company formation agency like Coddan. A company of this type has a director, agrees direction at annual AGMs and may in some cases be registered with the Charity Commission.
Companies limited by shares have a more typical structure of at least one general director, who is responsible for much of the decision making and operational activities of the company, as well as limited members. This latter group's role is to provide investment capital to the company. Company limited by shares cannot be converted into the company limited by guarantee.
The capital raising implications of the companies is a key differentiation, although it should be clear which formation is more appropriate for a group. Both can take out loans, but companies limited by guarantee cannot issue shares. Instead, they can issue debentures. Companies limited by shares can, by definition, issue their own shares and enjoy greater capital raising abilities, as well as the increased risk that goes with them.