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A guide to Companies Limited by guarantee, contributed by ACCA

Often a source of confusion, this guide to what constitutes a company limited by guarantee should help.

Companies limited by guarantee is one aspect of financial reporting that causes more confusion than it should when, in reality, it is fairly straightforward.

A company limited by guarantee is just a limited company, but with the obvious difference to the usual company entity of there being no share capital. The company’s members are guarantors rather than shareholders.

This form of company entity is often used by charities, but not all companies limited by guarantee are charitable in nature. Other common uses for this type of company are membership organisations and clubs, including sports associations. It is less likely to be used by a normal trading business, as profits cannot be distributed to members by way of a dividend.

The same rules and regulations apply to companies limited by guarantee as to companies with a share capital. This means that the company will have to file accounts at Companies House within the usual deadline, file annual returns, keep proper accounting records, appoint directors and file returns with HMRC. If the company is a charity, registered with the Charity Commission, it is likely that HMRC will not require a CT600 and there will be no corporation tax to pay. But this is not a blanket exemption, and the status of being limited by guarantee does not, of itself, allow a company to escape the liability to corporation tax. The company is required to have at least one director.

Main difference

The main difference between a company limited by guarantee and one limited by shares is that the liability of shareholders is limited to the amount unpaid on shares, whereas the liability of guarantors (the members of a company limited by guarantee) is limited to the amount that they guaranteed. In most cases the amount guaranteed will be £1 per member (similar to the ordinary £1 share in a company limited by shares).

Members cannot receive dividends, and will usually be involved due to their commitment to the company’s objectives, rather than to benefit financially. The memorandum and articles will usually differ from those of the standard share capital company and will generally include a defined list of specific objectives, and also a clause that prohibits the distribution of surplus profits.

The balance sheet of a company limited by guarantee will be the same as that of a company limited by shares, apart from the fact that it will have no share capital. The bottom section of the balance sheet should be headed ‘Reserves’ rather than the usual ‘Shareholders’ funds’. There is no requirement, but it is common practice, to also include a note disclosing the guarantees; something simple such as: ‘The company is limited by guarantee of members and does not have a share capital. The liability of members is limited to £1.’

The usual rules about related parties will apply, and the director(s) will be related parties in the usual way. Whether or not a member falls into the definition of related party will depend on the circumstances.

Payments to members can only be by way of remuneration, as no dividends are possible. If the company is a charity, the members may also be trustees, and there are of course rules about payments to trustees. If the company limited by guarantee is a charity, the disclosure requirements, rules and requirements laid down by the Charity Commission, the Charity SORP and the Charities Acts will also need to be adhered to.